This makes the connection between financial flows and economic activity operate through changes in the composition of demand and output, rather than “internal devaluations” which became especially fruitful for several Eurozone and EME countries in the past decade. The role of commodity prices Some EMEs, in particular those with large commodity sectors, may at certain episodes display a decoupling of capital flows from global financing conditions. This seems to have been the case in the aftermath of the Global Financial Crisis, in which the general risk-off attitude contrasted with the relative strength of commodity exporters due to China’s contribution to global growth. Indeed, the quick recovery in energy, food, and metal commodities beginning in 2010 led to a surge in growth and capital inflows to commodity-exporting EMEs that starkly contrasted with the depressed macroeconomic conditions that characterized the slow recovery of AEs. It is tempting to link the decoupling of economic and financial conditions of the 2010-13 episode as a sign that EMEs were beginning to overcome some of their past institutional weaknesses and policy mistakes. But the events triggered by the taper tantrum episode recommend taking this interpretation with a grain of salt. Indeed, such events mark a clear reversal in the outlook of EMEs and the direction of external financing to these economies, once again following closely the downward trend of global commodity prices. 2  See Elías Albagli, Luis Ceballos, Sebastián Claro, and Damián Romero (2018), “Channels of US Monetary Policy Spillovers to International Bonds Markets,” forthcoming, Journal of Financial Economics.

Even with forward-looking inflation targeting, the central bank may need not only tolerate significant deviations of current inflation from the medium-term target but also to exercise a lot of judgment in assessing when deviations in expected inflation originated in the ER justify a change in the policy stance. Tolerance to ER-induced deviations in inflation is easier the higher the credibility of monetary policy. If medium-term inflation expectations remain anchored at the policy target level, the central bank can count on economic agents to help convergence afterwards. Building a record of credibility and reputation has been a product of a coordinated, persistent, and long-term commitment by the Central Bank of Chile to the best practices on transparency and independence. A responsible and countercyclical fiscal stance is an absolute requirement for consistency of the overall macroeconomic framework. Besides from softening cyclical fluctuations, fiscal credibility is an important ingredient of MP credibility, as it alleviates potential concerns of fiscal dominance behind MP decisions. Finally, all of the above may need to rely on substantial financial buffers, like moderate levels of indebtedness by all major economic agents; safe financial assets (sovereign wealth funds); well capitalized banks, and so on. So, building a reliable floating ER regime able to cushion the domestic economy from financial and commodity shocks takes much more than courage and a statutory decision. It should be supported by a sophisticated financial and institutional architecture. This is not easy to capture in attributebased scoring systems.