Most of the selling pressure has come from foreign real-money investors seeking to hedge their portfolios from currency devaluation, Brazilian companies hedging their foreign exchange liabilities, and foreign companies hedging their exposure to local assets. There is no foreign currency shortage in the domestic spot market, which the Central Bank monitors continually. And therefore, at the Central Bank of Brazil, we responded to the change in global financing conditions in a classical fashion, through policy tightening, exchange rate flexibility and using accumulated buffers to reduce volatility, avoiding abrupt changes that potentially threaten financial stability. Accordingly, by mid-August, we announced a program of daily FX interventions through foreign exchange swaps and dollar credit line auctions, totaling in 2013 nearly USD 100 billion equivalent and scheduled through the end of the year, providing currency hedge for the private sector. Here the picture is mixed for emerging markets. Some are certainly feeling more the volatility than others. It depends on fundamentals, resilience, position in the cycle with its associated policy response, credibility of the buffers and willingness to use them timely and with a clear unambiguous communication. In sum, while the prospect of interest rate normalization as economic growth recovers in core economies is a net positive, it does create transition risks. The lesson I take from the last few months is that emerging market policymakers need to show that they are ready and capable of stepping in and providing the public goods of financial and price stability.

A further risk compensated by the risk premium derives from the expected volatility of an asset price during its lifespan. As monetary policy affects asset prices, it can also impact the expected volatility of asset prices and, in turn, again affect the risk premium. The link between the monetary policy instrument and any one financial market price is subtle and variable. Central banks would face an exceedingly difficult task if they had to rely on a single price to transmit monetary policy impulses to the real economy. The fact that monetary policy works simultaneously through several financial market prices reinforces the precision and the impact of monetary policy. So far, I have tried to outline how monetary policy impulses are transmitted to financial markets. The monetary policy instrument itself, typically a short-term interest rate, has only a limited impact on the real economy. Monetary policy works through its aggregate impact on financial markets. Monetary policy impacts financial markets mainly through expectations. Indeed, Michael Woodford (2004, p.16) argues that "for not only do expectations about policy matter, but, at least under current conditions, very little else matters". Expectations influence financial markets in two ways: first, directly via the yield curve, i.e. through expectations about the future evolution of the monetary policy instrument, and second, indirectly, via the expected effect of monetary policy on the real economy, which then feeds back to financial market prices. In practice, it is difficult to distinguish between direct and indirect effects.