But macroprudential measures need to be resorted to with a certain degree of precaution as well, since they may actually foster capital inflows and thus run counter to macroeconomic policies. Potential output declined severely in the aftermath of the crisis. A possible resumption in capital inflows would take aggregate demand higher and hence generate an inflationary production gap. Emerging countries would resort to fewer forex market interventions, allowing their currencies to appreciate in order to contain inflation. However, the long-term financial stability gains derived from macroprudential measures entail further capital inflows. The tolerance for currency appreciation (fewer interventions) may be reversed in light of the larger capital inflows. Moreover, a stronger currency may foster further inflows of portfolio investment. This goes to prove that not all measures trying to fend off capital flows are necessarily successful in reducing the incentives for capital inflows. Let me conclude by saying that the available measures to address large capital inflows are not safe from side effects. The policy mix needs to be conceived so as to maximize the benefits of capital inflows while insulating against related risks (Zhu, 2011). In a world where sustainable economic growth hinges on free markets, capital controls should only be considered as a measure of last resort, if at all. Prudential measures should be designed to minimize the distortions they trigger and should be resorted to only after all macroeconomic options have been exhausted. 6  BIS central bankers’ speeches  4. Foreign-owned banks – asset or liability?

To sum up, the present financial situation of enterprises and households, while still strong, is less comfortable than it was some years back, so it is not as strong to deal with a worsening of the domestic or international macroeconomic environment. Thus, it is important for agents to thoroughly assess their borrowing and lending decisions going forward. I would like to finish with some thoughts. Final thoughts 2014 has not been a good year for our economy: growth has been slow and inflation has surpassed our tolerance range for several months. The analysis I have shared with you today shows that to a great extent these numbers result from the natural adjustment of an economy experiencing major changes in both local and external conditions. These changes require big adjustments in relative prices to reallocate resources across sectors. We mustn’t forget that the external scenario has been greatly modified in the past few quarters. We saw the end of the so-called commodity super-cycle. Its negative impact on the copper price has affected mining investment, one of our economy’s main sources of growth in recent times. China’s economic situation has been weaker than forecast, as has been the situation of several other emerging economies. This has increased the volatility of the external financial conditions facing emerging economies, a phenomenon that has intensified as the normalization of US monetary policy approaches. We have been often asked whether the discussion on the reforms now being studied in the country has played a role in our economic slowdown.