well as the absence of large mismatches in the financial sector. it is not the purpose of my talk to narrow the definition of financial stability, so i will use the term in a broad sense. there is also the key distinction between micro and macro financial stability, and in most of what follows i will be focusing on the systemic aspects of financial stability, unless noticed otherwise. this idea is consistent with the principle known as the tinbergen rule ( tinbergen ( 1952 ) ). the framework discussed in this presentation takes the perspective of a small open economy like chile. in many emerging markets the concern for financial stability was explicit, especially regarding international financial transactions. this was not the case in many advanced economies that, as price stability became the main objective, financial stability played a secondary role, or often no role at all. for further discussion, see de gregorio ( 2011 ), and bernanke ( 2011 ). bis central bankers ’ speeches the recent crisis calls into question the view that macro and financial stability can be really seen as separate objectives. in fact, it seems to have brought a reminder that in the end, macroeconomic and financial stability are related, both directly and through the instruments used to achieve each of them. the direct linkages are natural : it is difficult to imagine a stable financial system operating in a volatile macro environment. financial systems are good at dealing with idiosyncratic risks, but their ability to deal with aggregate risk is more limited, especially in emerging markets. vice - versa, financial instability typically ends up creating macroeconomic fluctuations. the uncertainty that accompanies periods of financial instability leads investors and consumers to postpone investment plans and the purchase of durable goods, with foreseeable consequences for output and inflation. moreover, extreme episodes of financial instability that lead to financial crises almost always end up in a sharp and costly recession. there are also indirect linkages between macro and financial stability through the main instruments used to achieve them. the main tool used by most central banks to achieve macro stability is the management of a short term reference interest rate. movements of this benchmark rate not only directly affect the consumption / saving decisions of firms and households, but also have consequences for all asset prices ( e. g. equities, bonds, exchange rates, housing ), the cost and availability of credit, and the willingness of investors to take risks. for instance, in a stable context, persistently low interest rates may generate incentives for investors whose income depends

of capital and would hit especially hard bankdependent firms and consumers while other borrowers would turn to other sources of financing. furthermore, the relatively high - frequency changes that managing macro bis central bankers ’ speeches conditions may require may create unnecessary policy - driven volatility in financial markets. all this indicates that it is more appropriate to tackle each goal with its own type of tool. the separation of the instruments does not necessarily mean that the achievement of the goals can be separated operationally. because of the dual causality of price and financial stability, monetary and financial policies should be explicitly coordinated. how this coordination is achieved varies across countries. at the very least, instances to monitor global risks to financial stability should exist. central banks should be involved in these monitoring instances ( or should centralize the monitoring and supervision functions ) because of their relative advantages in providing a macro view of the economy and their market contacts, due to the implementation of monetary operations. in addition regulation that could have systemic implications should be discussed in these instances. 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 visa - 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