jose de gregorio : exchange rate and export development speech by mr jose de gregorio, governor of the central bank of chile, at the special session on exchange rate at the chamber of deputies and the 23rd national meeting of fruit and vegetable producers, santiago de chile, 6 october 2010. * * * chile has prospered during recent decades thanks to globalization. having tried various strategies, we can say we have reached consensus on this matter. for an economy of our size and characteristics, opening up to the rest of the world is essential for creating the competition and efficiency that will stimulate development. four decades ago, this idea was a voice in the desert in developing economies, but today it is the accepted norm. there is also consensus that monetary and exchange policy should be conducted by an autonomous central bank, and that fiscal policy should be governed by transparent, predictable and sustainable rules. after much trial and error, our country adopted an institutionality that has allowed us to walk through complex international situations with relative stability. today i would like to discuss how we at the central bank of chile view the challenges facing export development, in particular with regard to monetary and exchange - rate policy. let me open by explaining the four principles guiding our decisions, so i can clarify some misconceptions with respect to the central bank and the exchange rate. to begin with, the central bank is not indifferent to the movements of the exchange rate, in the same way as we are not indifferent to the evolution of unemployment, credit or any other variables relevant to the country ’ s economic performance. the bank ’ s constitutional act mandates that we safeguard price stability and the normal functioning of internal and external payments, but fulfilling this mandate requires us to adopt those measures which will drive the economy to making full use of its resources and maintaining a sustainable balance of payments. price stability and financial stability are cornerstones of our economy ’ s performance, growth potential and human well being. i could make a lengthy discourse about how the central bank reconciles its mandate with welfare objectives but i think it is enough to observe our track record over the past two years to recognize that if output and employment are recovering so strongly today, it is largely thanks to the flexibility of our monetary policy in facing the worst global economic downturn in almost a century. our second principle is that we have to evaluate the effectiveness, costs and benefits, of our actions. we must also explain with maximum rigor and transparency our decisions and opinions regarding the main trends of our economy.

to slow down the spread of the virus, which, together with the natural fear of the population, has had a significant impact on the economy. in particular, measures to prevent person - to - person contact, such as suspending educational activities, closing down borders, internal sanitary cordons and collective quarantines, have paralyzed entire sectors — especially services —, affecting logistics chains and compromising the cash flow of businesses in many countries. the unprecedented magnitude of these phenomena and their dissemination on a global scale has been reflected in a deterioration of world financial conditions, the most significant since the global financial crisis of 2008. central banks and governments in several countries have announced substantial measures to mitigate the impact on income and placate market fears. however, more prolonged damage and a slower recovery cannot be ruled out if containment measures are kept for too long, beyond the authorities ’ strengthened efforts of impact mitigation. thus, during the last week of february and the first half of march, the growing fear in the financial markets triggered an increase in demand for safe assets, which contributed to a widespread fall in stock markets, a compression of long - term interest rates, an appreciation of the dollar and across - the - board falls in commodity prices. towards the second half of march an increase in the demand for liquidity in dollars was observed, to the detriment of practically every other asset class. this reflects the strong preference for cash as households, businesses, banks, and financial intermediaries anticipate significant cash needs for the coming months. emerging economies have suffered from currency depreciation, capital outflows, sharp falls in stock prices and rising risk indicators. in any case, in recent days there has been a partial reversal of these phenomena, as a reaction to the measures announced by various policymakers ( figure 1 ). chile has also felt the effects of the global financial turbulence. our currency has depreciated, the stock market has deteriorated markedly, sovereign risk spreads have widened, and long - term interest rates have risen. even so, these movements have been more moderate than they have been in comparable economies, which seems to recognize our stronger macroeconomic fundamentals, the role of the exchange rate as a shock absorber and greater policy space to tackle the crisis ( figures 2 and 3 ). there is no doubt that this global crisis will affect chile, and it will do so through various channels. firstly, regarding the effects from abroad, it will cause a considerable drop in trade