In particular, the very favorable world economic conditions that have resulted in important terms of trade gains have been associated this time to fiscal prudence, complementing monetary and exchange-rate policies aimed at achieving and maintaining price stability. Four areas of macroeconomic adjustment: Fiscal, monetary and exchange rate policies, and the financial system The main changes that have taken place are in four key areas: (i) adoption of sustainable and responsible fiscal policies, reflected in declining fiscal deficits in most emerging economies (figure 1); (ii) adoption of floating regimes or hard pegs, moving away from intermediate exchange-rate (ER) regimes; (iii) shift of monetary policy (MP) anchors from ERs or monetary aggregates to an inflationtargeting (IT) anchor, particularly in Latin America; and (iv) these changes have been accompanied by the strengthening of regulation and supervision of financial systems, supporting strong financial development. Shift toward more flexible ER regimes The world shift toward more flexible ER regimes has been pronounced. The evidence shows a significant shift away from intermediate regimes. In 1990, nearly 70% of all countries were pursuing some variant of intermediate ER regimes, a share that dropped to 41% by the end of the 1990s, and further to 30% in 2004 (figure 2)1. Exits from intermediate regimes were more frequently towards floats rather than to hard pegs. The share of floaters increased from 15% in 1990 to 45% in 2004 while, on the other extreme, the share of hard pegs rose from 15% to 26% during the same time span.

Since then, the financial system has developed around a well-managed and capitalized banking sector that is both healthy and competitive. This feature also rules out financial dominance of monetary policy in Chile. The CBC shares normative attributions with a specialized public institution, focusing on the formulation of financial regulations applicable to monetary markets. Chile’s financial system strength has been acclaimed by international credit rating agencies. Moody’s Financial Strength Ranking places Chile’s financial strength close to the top of industrial countries (figure 5). 2  BIS Review 68/2007  Monetary policy framework: Central Bank charter and its objectives Although the road to CBC autonomy began in the mid-1970s, the 1989 Constitutional Law of the CBC specified the Bank’s objectives and granted CBC the necessary instruments to comply with its legal mandate. Since 1989, the CBC is an autonomous, technical institution, governed by the Constitution, with full legal capacity, control of its equity, and of indefinite duration. The constitutional law establishes two objectives for the CBC. The first objective is to preserve the stability of Chile’s currency. This means avoiding loss of purchasing power due to inflation. The latter objective is achieved through ensuring that inflation remains low and stable. The second objective of the CBC is to ensure the normal functioning of domestic and external payments, by safeguarding the financial sector’s primary functions of credit and savings intermediation, provision of payment services, and proper risk allocation by financial markets. CBC’s Constitutional Law prohibits CBC credit to the government.