##cuniary externalities, of inefficient fluctuations in credit standards, or of other types of financial frictions may lead to perverse situations where these inflows result in excessive credit growth, risk taking, or misallocation of capital. an important amount of recent research has been devoted to understanding how an economy may borrow in excess and miss ‐ allocate credit. 3 of course, if we believe that these frictions are present and strong, first ‐ best policy actions should aim to undo them. but this may not be feasible, either because we are unsure about the presence, type, or magnitude of the frictions involved, or because first best policies cannot be implemented in the timeframe required. in such a situation, policymakers may have to resort to second best policies. we will address some of the roles of financial frictions in the transmission of foreign shocks in the presentation by javier garcia ‐ cicco this afternoon. on top of the difficulties with implementing first best policies, policymakers may feel compelled to act fast because past experience has led them to be wary of surges in capital inflows. history has taught us that these inflows have a tendency to end in sudden stops and sharp currency depreciations that for some countries may result in recessions and crises. in the session of tomorrow morning, the presentations by jaume ventura and sebnem kalemli ‐ ozcan will address some of the potential consequences of the capital inflows to financially ‐ integrated emerging economies : the appearance of asset price bubbles and the transmission of foreign shocks. these concerns have led several countries inside and outside latin america to implement interventions in the forex market, capital ‐ account ‐ management and macroprudential policies to reduce the financial vulnerabilities that may arise from real exchange rate misalignments, fast credit growth, maturity or currency mismatches, and housing price increases. these types of policies have been more prevalent among emerging markets. but they have also been implemented by developed countries. for instance, switzerland has actively intervened to maintain the value of the swiss franc relative to the euro, and south korea has for example, forbes and warnock ( 2012 ) indicate that global factors were the most important drivers of capital flows to emerging markets, especially debt flows. fratzscher ( 2012 ) uses an event study methodology to show that qe announcements had an effect on equity and debt flows to emerging economies. see bianchi ( 2011 )

, it is likely that the impact of the removal of qe will not be the flipside image of its implementation. let me turn now to the last determinant of the impact of a reversal : what countries do in the meantime. recent events have shown us that even a gradual normalization of global monetary conditions may not be welcome news for all countries. for various reasons, these conditions have bred more vulnerability in some countries than in others. those countries that have been running large current ‐ account deficits, where these deficits have been financed mainly with debt, where fiscal positions are weak, and where capital inflows have bred large expansions in credit, may have already become too dependent on abundant and cheap international funding. thus, we have ended up in a somewhat strange situation where countries that not long ago were complaining about receiving too much capital inflows are now complaining about a potential shortage of funding. countries in this situation should consider the temporary postponement of tapering as a welcome opportunity to reduce their vulnerability by strengthening their fiscal position and addressing potential risks in their financial systems. there is still time, but the clock is ticking. let me be clear : tapering will take place, global monetary conditions will and should eventually normalize, and the times of extremely cheap and abundant international financing will end. in chile, we are currently in a situation where we do not consider tapering as bad news. after declining for some quarters, our trade balance has gradually improved. gross inflows are still concentrated in fdi, and an important part of foreign expenditure goes to investment goods. furthermore, chilean residents, mainly through pension funds, have large gross foreign asset positions, which have lately acted as a buffer against fluctuations in gross inflows by non ‐ residents, as mentioned in the latest world economic outlook. our fiscal position is solid. the on ‐ shore peso rates have not moved in tandem with the latest global increase in long term rates, but instead they have actually fallen. and we have maintained a regime of fully flexible exchange rate that has helped us deal with external shocks in an economy with small degrees of dollarization. regarding financial markets, credit growth in chile has been robust, although it has decelerated recently, and house prices have increased at a steady rate, but we see no reason to be especially worried about these developments in the short term. nonetheless, as we have repeatedly mentioned in our financial stability reports, we closely monitor developments in financial markets to act in coordination