banking system and the credit crunch that led the u. s. economy to the great depression. he also deeply studied the particular issues of monetary policy under stress such as the zero nominal interest rate case. ben has insightful knowledge on how liquidity constraints in the banking system could translate into problems in the real economy. he thoroughly acknowledges the boundaries of monetary policy that only have interest rates as a tool. i discussed this with him many times for the case of emerging markets. this background helps to better understand the wave of liquidity injections that the fed has adopted since mid - 2007. this view can also explain the recent disagreement between the foms members at the time of voting changes in rates. however, the jury is still out there. there is no guarantee that credit will be restored soon as we are clearly facing a solvency problem. also, credibility is at stake. the shift away from “ market ” measures to a “ rescue ” kind of approach may encourage reckless behavior in the future. it may also undermine the “ inflation fighter ” track record of the fed. the aggressive moves are going far beyond than the so - called “ greenspan put ” that was behind the scenes over the last years. in the euro area the “ re - coupling ” story seems very reasonable to me. growth prospects are rapidly deteriorating and the risk of recession should not be underplayed. the european downturn could take longer to run its course than the u. s., but it will probably also last longer. in fact, borrowing costs for consumers and firms have already increased as banks ran up losses on investment tied to u. s. mortgages. further losses in the banking and financial system could soon be disclosed, impairing bank lending and hitting corporates in particular. a reversal in the capital flows of banks from subsidiaries in the emerging world to meet liquidity and solvency requirements in their main houses in europe is something to closely monitor. on the other hand, persistent inflation and budget deficits may prevent policy makers from moving aggressively to stall the vicious circle of mounting financial losses and recession. today intervention is a “ worldwide ” phenomenon. in the uk, mervyn king is prepared to adopt a “ long - term resolution approach ”, which includes acquiring illiquid assets from banks to improve their financial condition and cutting interest rates to provide liquidity. we have seen all across the developed countries the kind of “ unconventional policymaking ” that was very much condemned in the emerging world : policies that, at

stage compared to the current situation in other latin american countries. hasty diagnosis and simplistic comparisons among the various countries ’ situations may lead to inappropriate policy recommendations. under these circumstances, a sustainable and long - lasting reduction of inflation depends on the comprehensive, joint and coordinated action of the monetary policy, the fiscal policy, the wage policy, and the competition policy during the transition phase. the path is a sequential one while we build the traditional monetary tools as effective policy instruments. within this framework, today ’ s monetary and financial strategy is based on three main pillars : first, a robust and consistent monetary policy that ensures the equilibrium between supply and demand in the monetary market. this system is the most appropriate for an economy that still makes intensive use of relatively liquid means of payment and has a relatively low bank penetration. for the first time after the crisis, money supply is growing below the growth of nominal gdp, reflecting the prudential bias of our approach. the control of the growth in m2 is based upon a deep sterilization policy, which its key element is the issuance of bills and notes of the central bank and the development of a repo market. and these securities are by no means straight public debt ( the central bank is not using them to finance itself ). they reflect postponed liquidity ( they will be monetized when circumstances require so as it happened in the second half of 2007 ). second, a managed floating exchange rate regime that enables us to weather situations of financial stress – that is, a regime that provides predictability. we do not want to prevent variables from converging to their long - term values, but we would rather avoid excessive volatility as a source of unnecessary disturbances in economic decisions. on the other hand, we do not want to provide any sort of insurance that favors speculative flows. third, countercyclical policies to prepare the economy against shocks. these include the accumulation of foreign reserves and a sound financial system that buffers turmoil, instead of spreading it. i cannot find a more telling proof of the reasons why we have pursued antyciclical policies – such as foreign reserve accumulation – during these years : the recent external shock we faced can be compared to the “ tequila effect ” in terms of the magnitude of the outflows, but had a mild impact on domestic variables. the monetary and financial system truly protected it against financial contagion. another example of our risk management approach is the recovery of banking liquidity and solvency