come to mind. the first is the current concern regarding capital inflows and financial stability. many have argued – rightly, i think – that large capital inflows could simultaneously lead to increasing financial vulnerabilities without posing an inflationary problem because of the appreciation of the local currency. the correct reaction for ps – keeping loose monetary conditions – is not necessarily the correct reaction from an fs standpoint. the second is the build up to the global financial crisis in the us and europe. one of the reasons that monetary policy did not react to rising household debt, was that global supply factors had been contributing to drive prices down. central banks need to oversee price stability and financial stability. one instrument ( namely, the interest rate ) is often not enough for pursuing two objectives. more generally, the two objectives should be addressed with more than one instrument. the choice of instrument will depend on both the cause of the financial fragility and the institutional setting of each country. for a start, central banks should work closely with “ micro - prudential ” supervisors, communicating potential risks so that these can be incorporated into the supervision process or into changes in regulation. a regional house bubble would be a good example of this kind of coordination, with supervisors adjusting provisions accordingly. in addition, central banks chapter v, financial stability report 1st half 2009, central bank of chile. http : / / www. bcentral. cl / publicaciones / politicas / pdf / ief2009 _ 1. pdf should consider macro - prudential regulation that adjusts capital, liquidity or asset quality regulation through the cycle or in periods of higher risk taking. finally, central banks should not discard using their balance sheet to “ correct ” the prices of financial assets when these asset prices are leading to increased vulnerabilities in the financial system. in emes this is typically the case of a boom where there are signs that the currency may be strengthening beyond its fundamentals, in which case a mechanism of selfinsurance, such as accumulation of reserves, may help to smooth the transition and to have the economy well - prepared for potential reversals of capital flows. in the case of chile, we have intervened three times in the exchange rate market since the currency was allowed to float in 1999. in the first two cases ( 2001 and 2002 ) events in international financial markets led to rapid depreciations, unrelated to country fundamentals. in the last case – 2008 –

jose de gregorio : imf challenges and policies for the global economy statement by mr jose de gregorio, governor of the central bank of chile, speaking on behalf of the southern cone countries of latin america international monetary and financial committee meeting, washington dc, 24 september 2011. * * * in the past few months, the near - term prospects for the global economy have worsened significantly and financial risks have increased. what some time ago was a modest, albeit unbalanced recovery, risks turning into a new economic downturn, particularly in major advanced economies ( aes ). this new scenario poses urgent challenges to the imf and to the membership in terms of decisive political and policy responses to solve fundamental weaknesses and mitigate the negative impact of this new downturn. against this backdrop, the fund ’ s surveillance capacities, and a well - functioning international monetary system ( ims ), are being and will again be put to the test only a couple of years after the 2008 – 2009 great recession and financial crisis. i. the immediate challenges ahead and the fund ’ s policy advice two forces are influencing each other and weighing down on economic prospects in major advanced economies. on the one hand, uncertainty and volatility have increased to their highest levels since october 2008, constraining credit and leading to more cautious behavior by households and financial institutions. on the other hand, fully credible medium - term fiscal consolidation in those economies with high debt burdens is still lacking, prompting even higher sovereign spreads and more calls for short - term fiscal retrenchment when private demand has yet to recover to its pre - crisis levels. the policy debate surrounding the appropriate fiscal and monetary policy mix, as well as the assessment of public debt sustainability, have become muddled. it would be paradoxical that only a few years after witnessing an example of successful global policy coordination and sound financial policies, which staved off another great depression, the lessons learned were to be ignored. the fund can provide guidance and leadership on a number of issues, and the membership should heed its advice. in particular, we would like to note that : the political will to achieve meaningful short - term fiscal adjustment is more present in those core aes where public sector financing conditions are benefiting the most from flight to quality, whereas in cases of more acute solvency concerns, and thus higher spreads, adjustment fatigue is dangerously settling in. the negative growth implications of further short - term fiscal retrenchment have not been given proper regard