We have policy space today due to our preventive, cautious and prudent policies that preserved macro-financial stability through the adoption of a pragmatic approach towards capital inflows over the last few years. It is now a well-understood and documented story: ample global liquidity due to easy monetary policies in advanced economies resulted in exceptionally intense capital flows to emerging market economies. And we know that large and volatile capital inflows can potentially lead to economic and financial instability. They are associated with excessive credit expansion, lower quality of loan origination, increased financial system exposure to exchange rate risk, asset price distortions, including excessive exchange rate appreciation,  BIS central bankers’ speeches  1  and inflationary pressure, as excessively easy global monetary conditions can boost domestic demand independently from the desired domestic policy stance. In a nutshell, excessive flows are a fertile terrain to grow excessive financial exuberance. The textbook policy response for my country and other EMEs was to use its floating exchange rate regime, which helps to smooth economic and financial adjustments, while conducting sterilized interventions and international reserves accumulation, which reduces exchange rate volatility and builds a foreign currency liquidity buffer to prepare for reversals. But the intensity of this inflow episode was special as were the circumstances and policy responses in advanced economies1. Therefore, Brazil and other emerging markets pragmatically complemented their response and other textbook (aggregate demand) policies with the implementation of specific macroprudential policy measures to prevent the exuberance deriving from these large inflows to threaten financial stability.

); (b) maintain financial and price stability; after having policy-engineered their V-shape recoveries, controlled their inflationary consequences and managed destabilizing large capital inflows; (c) calibrate their responses to this transition period of exiting from unconventional monetary policies, using their uneven policy room for maneuver and their preparedness; and (d) make the best possible use of the foreseeable changes in relative prices including their own asset prices; these changes are either occurring or in the making, in the light of the expected shifts in global monetary conditions in the coming months. I will focus my remarks tonight on three issues: (1)  how we prepared ourselves with policies put in place in Brazil and other EMEs over the last few years to sail through a period of intense capital inflows and to be well positioned for the exit from unconventional monetary policies;  (2)  notwithstanding that preparation, what has been the impact and the response to the start of the normalization of monetary conditions; and  (3)  what are the few analytical and policy lessons learned in the last few years with regards to the inflation-targeting framework for monetary policy in the context of the post-crisis challenges. The policy response to large and volatile capital inflows Let me begin by revisiting the rationale of the policies that many emerging markets put in place during the most expansionary phase of advanced economy monetary policies.