In Latin America, the hoarding of reserves has been used several times. In the first half of the 1990s it was used to deal with strong capital inflows; in the 2000s it has been used much more frequently (figure 8). Intervening the foreign exchange market via reserve accumulation also serves the purpose of improving the international liquidity position, which is a form of self-insurance against external financial turmoil. Today other forms of insurance are available, that are more costeffective. For example, this is the case of contingent credit lines of the IMF or hedging instruments to hedge against fluctuations in the terms of trade (Borensztein et al., 2009; Caballero, 2009). But the estimated benefits of these forms of insurance vis-à-vis selfinsurance through reserve accumulation do not consider the fact that this latter option has also a stabilizing effect on the exchange rate, because the accumulation is done at a time when the exchange rate is overly appreciated with respect to its fundamentals. Furthermore, one can think that the presence of efficient insurance mechanisms may exacerbate capital 4  BIS Review 72/2010  inflows during boom periods in emerging economies. Therefore, these are instruments that can prove beneficial in critical times, but may create some inconveniences in normal or favorable periods. Some economies have adopted regimes where limited interventions are applied with some frequency. Nonetheless, larger interventions, which are precisely the ones that may have a substantial effect on foreign exchange markets, entail quasi-fiscal costs that must be taken into account.

Against this background, the predominant view has emerged that the best and most lasting contribution that monetary policy can make to long-term economic welfare is that of safeguarding price stability. Therefore, central banks throughout the world have been moving towards adopting long-term price stability as their primary goal. In order to achieve this goal most successfully, independence from political interference and a clear legal mandate for price stability are of the utmost importance. A lack of independence and an ambiguous mandate can easily force central banks to focus on the short term, and thus to fail to adopt the forward-looking, medium-term orientation that is crucial for a successful monetary strategy. These aspects were taken into consideration by policymakers when drafting the Maastricht Treaty. The mandate to maintain price stability cannot be seen in isolation. The Treaty assigns other tasks to the Eurosystem. Article 105 requires that the Eurosystem “without prejudice to the objective of price stability … shall support the general economic policies in the Community, with a view to contributing to the achievement of the objectives of the Community.” These Community objectives include “sustainable and non-inflationary growth” and “a high level of employment”. But, given the qualification “without prejudice”, the Treaty also clearly states how the Eurosystem shall set its priorities. A contribution to the achievement of the other objectives of the European Community can only be made if the Eurosystem’s primary objective is not compromised. However, there is ultimately no incompatibility between maintaining price stability and pursuing these other objectives at Community level.