Not dealing with inflationary pressures in a timely manner, however, could result in economic overheating and rising inflation. Most emerging markets have enjoyed great success from trade openness and export-led growth, and hence their worries arising from exchange rate appreciation are well justified. However, it is important to distinguish between real appreciation – the relevant variable from  BIS central bankers’ speeches  1  the competitiveness standpoint – and nominal appreciation. Exchange rate actions that attempt to mitigate a real exchange rate appreciation will have only transitory effects, which could provide valuable time for the economy to adjust to a new global environment and might hence be relevant from the point of view of welfare, but cannot be thought of as a permanent tool to foster competitiveness. In order to sustain the real exchange rate, real actions need to be taken, such as increasing domestic savings. It is time to rebuild fiscal buffers in emerging market economies and accelerate the pace of reforms to achieve productivity gains that can sustain competitiveness. It is important to note that the economic strength of EMEs relative to advanced economies is the main reason why their real exchange rates are appreciating. In addition, the correction of global imbalances requires both an increase in consumption in surplus economies and a shift of this greater demand towards goods produced by advanced economies, especially since in the latter growth of domestic demand will be sluggish because of the post-crisis deleveraging process. Relative price adjustments around the world should help this process.

However, if possible, the speed at which this is done should be kept in line with the capacity of domestic regulators and supervisors to monitor and respond to the potential risks generated by these changes. Concluding remarks Regarding monetary policy, the main challenge of EMEs today is to avoid persistent deviations of inflation from its target, especially in an environment where the price of agricultural commodities and oil have been rising sharply. Changes in relative prices have to take place, but the risk of propagation to other prices has to be mitigated, in particular in economies, like Chile, that are operating close to full capacity. Monetary policy cannot be subordinated to exchange rate objectives, even in cases where measures to alleviate exchange rate appreciation have been adopted. This is the reason why in Chile we implement sterilized intervention in a fully transparent way, with pre-announced magnitudes for foreign exchange purchases. This allows preserving independence of monetary policy to stabilize inflation. Regarding financial stability, I have outlined some issues relevant to EMEs, but there is a need for global cooperation. My opinion is that too much of the recent discussion on capital inflows has been framed from the perspective of recipient countries. Although this view is certainly relevant, it is incomplete. The risks of excessive currency mismatches, overvalued assets, complex products and so on, are also relevant for the institutions making these investments – be they large internationally active banks, defined benefit pension funds or insurance companies.