vittorio corbo : monetary policy in emerging countries – the view from chile speech by mr vittorio corbo, governor of the central bank of chile, at the bank of italy, rome, 18 june 2007. prepared for presentation at banca d ’ italia. i thank marcelo ochoa and ivonne vera for assistance and klaus schmidt - hebbel and andrea tokman for suggestions and comments. * * * emerging economies have recorded major progress in the conduct and results of monetary policy during the last two decades. this achievement is due to implementation of more robust and transparent monetary regimes, complemented by adoption of flexible exchange rates, sustainable fiscal policies, and stronger financial systems. among emerging economies, chile ’ s experience is of particular interest. it shows that monetary stability can be attained as a result of coherent policies, overcoming decades of macroeconomic instability and weak credibility. this presentation documents the improvement of monetary policy conduct and results in emerging economies in general and chile in particular. section 1 summarizes the overall trend and specific components of macroeconomic adjustment observed in emerging economies. chile ’ s transition toward its current monetary policy framework, based on full - fledged inflation targeting, is described next. section 3 analyzes and documents the results of improved monetary policy in emerging economies and in chile during the last two decades. brief conclusions close the presentation. 1. macroeconomic adjustment in emerging economies macroeconomic management in emerging markets has improved substantially in the last decade. in particular, the very favorable world economic conditions that have resulted in important terms of trade gains have been associated this time to fiscal prudence, complementing monetary and exchange - rate policies aimed at achieving and maintaining price stability. four areas of macroeconomic adjustment : fiscal, monetary and exchange rate policies, and the financial system the main changes that have taken place are in four key areas : ( i ) adoption of sustainable and responsible fiscal policies, reflected in declining fiscal deficits in most emerging economies ( figure 1 ) ; ( ii ) adoption of floating regimes or hard pegs, moving away from intermediate exchange - rate ( er ) regimes ; ( iii ) shift of monetary policy ( mp ) anchors from ers or monetary aggregates to an inflationtargeting ( it ) anchor, particularly in latin america ; and ( iv ) these changes have been accompanied by the strengthening of regulation and supervision of financial systems, supporting strong financial development. shift toward more flexible er regimes the world shift toward more flexible er regimes has been pronounced. the evidence shows a significant shift away

’ s transition to its current monetary policy framework the macroeconomic institutional and policy framework of chile has been transformed radically in the last 25 years, from one that made stabilization an exceptional result to one that has facilitated achieving price stability. chile ’ s current macroeconomic framework is based on four pillars : ( i ) an autonomous central bank with the explicit mandate of safeguarding stability of prices and payments ; ( ii ) a low public - debt to gdp ratio and a fiscal policy rule anchored to a structural fiscal surplus ; ( iii ) a robust financial system, with a dynamic, competitive, and well capitalized banking industry, appropriately regulated and supervised ; and ( iv ) a full - fledged inflation targeting monetary framework, complemented by a floating er regime. substantial progress was made in cbc autonomy since the 1980s, when autonomy was very weak, even at lower levels than in the average emerging economy. the granting of legal independence in 1989 through constitutional law, led to a much improved position in the international ranking of central bank autonomy. particularly economic independence of central banks – the freedom of taking policy decisions independently of political interference – places chile well above the average level of independence of both emerging and developed economies in 2003. chile has shown a responsible fiscal policy, which has contributed significantly to successful monetary policy. during the 1990s, the fiscal balance averaged a surplus of 1. 5 % of gdp. the above - mentioned structural fiscal surplus rule stabilizes government spending over time, by linking it explicitly to permanent government revenue. therefore fiscal dominance of monetary policy is ruled out in chile, as a result of central bank autonomy and chile ’ s sound fiscal policy. public debt has shown a substantial decline since the 1990s, as a result of prudent fiscal policy. the share of consolidated gross public debt has been reduced from 76 % of gdp in 1990 to 20 % of gdp in 2006, whereas the consolidated net public debt position turned from 34 % of gdp in 1990 to - 6 % in 2006 ( figure 3 ). the successful performance of the fiscal position has been enhanced by the fiscal balance rule applied since 2001 ( figure 4 ). chile ’ s good growth performance, complemented by a market - based incentive structure, appropriate regulation and sound supervision of the financial system, has resulted in a safe and sound financial system and deep capital markets. as a result of the major banking crisis that came with the deep 1982 - 1983 recession, the 1986 banking law enhanced regulation and supervision of the financial system. since then, the financial system has developed around