In the case of Chile, the supervisory landmark is made up of three superintendencies (including banks). In this setting, coordination for systemic stability is achieved at two levels. One the one hand, the Central Bank is involved in several aspects of financial regulation directly by dictating regulation, or by participating in consultations with other agencies. On the other hand, the Central Bank participates in two coordination instances with the superintendents and finance ministry. The experience during the last years has shown that during periods of financial turmoil, mainly as result of external shocks, the Central Bank, the Finance Ministry, and the financial regulation agencies have indeed worked in close coordination, and, as the global financial crisis testifies, results have been positive. Moreover, in Chile, as banking supervision takes place outside the Central Bank it is key that it is not out of touch with the broader macro environment, so that financial system stance visà-vis the risks perceived in the macro-outlook is the natural first step in the supervisory process. Recently, these instances have been formalized with the creation of a Financial Stability Council, headed by the Finance Minister. This council will, amongst other things, identify systemic risks and mitigation policies, and discuss the systemic impact of regulation. Summing up, monetary and prudential policies are closely connected, first because macroeconomic and financial stability are closely interlinked, and second because instruments designed to achieve stability in each front have cross effects. This interconnection suggests the need for coordination of both types of policy.

Of course, this policy is not free of cost, since holding reserves is costly, and therefore its use is limited.4 It is difficult to recommend a particular strategy, since realities are different across countries, not only on the nature and impact of capital flows, but also on the overall macroeconomic policy framework and deepness and strengths of financial systems. However, the general principles discussed above should be taken into consideration. Final remarks The connections between price and financial stability suggest that the central banks should consider the cross effects of financial policies and monetary policy. In countries like Chile, the central bank has an explicit mandate on financial stability, and many other countries are moving in this direction as the interactions among policies have been recognized. But also, it is important to have a close and continuous coordination among all authorities with responsibilities on the financial system. This coordination becomes also more needed in times of crisis or extreme distress, since the central bank has to implement its LLR functions. In normal times, the pursuit of price stability in a small open economy is not in contradiction with financial stability in the presence of capital flows. In this context, the potential vulnerabilities to high exchange rate volatility can be handled with prudential regulation. However, in episodes of capital surges that may affect macroeconomic and financial stability a close coordination of monetary policy and prudential policies is required. References Bernanke, B.S.