We have learned the lessons, and our challenge now is to restore prosperity with more resilient financial systems. Central banks have an important role in this endeavor. BIS Review 76/2010  7  References Bernanke, B. and M. Gertler (1999), “Monetary Policy and Asset Price Volatility”, in New Challenges for Monetary Policy, Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, 26–28 August, pp. 77–128. Bernanke, B. and V. Reinhart (2007), “Conducting Monetary Policy at Very Low Short-Term Interest Rates”, American Economic Review, 94(2), pp. 85–90. Bernanke, B. (2009), “The Crises and the Policy Response”, Stamp lecture at the London School of Economics, 13 January 2009, London, England. Cúrdia, V. and M. Woodford (2010), “The Central-Bank Balance Sheet as an Instrument of Monetary Policy”, mimeo, Columbia University. De Gregorio, J. (2008), “La Gran Moderación y el Riesgo Inflacionario: Una Mirada desde las Economías Emergentes”, Estudios Públicos, N° 110, pp. 5–20, otoño. English version, Banco Central de Chile, Documento de Política económica No. 24. De Gregorio, J. (2010), “Monetary Policy and Financial Stability: An Emerging Markets Perspective”, International Finance, 13(1), pp. 141–156. Galí, J. and L. Gambetti (2009), “On the Sources of the Great Moderation”, American Economic Journal: Macroeconomics, vol. 1 nº1, pp. 26–57. Goodfriend, M. (2010), “Central Banking in the Credit Turmoil: An Assessment of Federal Reserve Practice”, mimeo, Carnegie Mellon University. Murray, J. (2009), “When the Unconventional Becomes Conventional – Monetary Policy in Extraordinary Times”, Remarks to the Global Interdependence Center, Philadelphia, Pennsylvania. 8  BIS Review 76/2010
A credible inflation target with a flexible exchange rate regime should help to avoid the problems we faced during the 1990s. Indeed, during the period of large capital inflows, no monetary policy in Latin America operated under a full-fledge inflation targeting regime, and most countries had some form of exchange rate rigidity. Despite having a flexible exchange rate and an inflation target in place, the effects on the exchange rate could reflect that domestic asset prices could be forming a bubble. In this case, sterilized intervention, without an explicit objective on the level of exchange rate, can also help. I already discussed some principles to guide sterilized intervention within an inflation targeting framework. A much debated proposal is the use of capital controls. The  5  In addition, a traditional concern is that with the same speed as capital flows in, capital may flow out, generating costly adjustment processes. See Cowan et al. (2007) for a review of sudden starts and sudden stops around the world. Sudden stops of inflows are as common in developed as in emerging countries, but in the former, the sudden stop tends to be offset by a return of domestic capital invested abroad, while in the latter it results in a severe squeeze in the capital account. Accumulation of reserves or another form of insurance should help to avoid large swings. BIS Review 113/2009  5  evidence on their effectiveness is elusive.