Crisis response: change in central bank interactions with markets The Markets Group’s monitoring responsibilities and broad array of contacts across different market segments were critical to identifying underlying causes of the increased volatility and sharp repricing observed across a wide range of financial markets in 2007 and 2008. This information contributed to policymakers’ understanding of where and how to target liquidity support measures beyond the traditional form of discount window lending to depository institutions. The temporary liquidity facilities were designed by drawing upon skills across the Federal Reserve System including market and operational experts, lawyers, economists and accountants. Given the unprecedented shocks to the market and the economy more broadly, the facilities had to be set up very quickly – in a matter of days or weeks. These included facilities designed to lend to banks and primary dealers to ensure adequate access to shortterm credit, such as the primary dealer credit facility (PDCF) and the Term Securities Lending Facility (TSLF). Other programs were designed to lend directly to borrowers and  2  To further this objective, the New York Fed also sponsors a private-sector group of market participants – the Treasury Market Practices Group – to support the functioning of Treasury, agency debt, and agency mortgage-backed securities markets. For further information, see the following: http://www.newyorkfed.org/ tmpg/index.html.
At the time, the real exchange rate was more appreciated than today, and it was only a few weeks before the financial crisis took a turn for the worse after the collapse of Bear Stearns, which warranted strengthening our international reserves position in the face of a very volatile global economic and financial scenario. The exchange rate depreciated in the first weeks after we announced the intervention, but the subsequent depreciation in the following months coincided with a widespread weakening of emerging currencies, increased risk aversion in global financial markets, a strengthened dollar and a fall in Treasury bonds’ interest rates. But it is also helpful to learn from other episodes, and an interesting one happened in 1997, when the real exchange rate hit its lowest since the crisis of the peg in 1982. That intervention amounted to around 4% of GDP, there were capital controls, net capital inflows were at 8.1% of GDP, the copper price was at $ per pound in dollars of today, and the net international position was more to the debt side, at 50% of GDP. Certainly, the floating regime, a monetary policy more aligned with international interest rates, and reduced capital inflows have been key in limiting the amplitude of exchange rate fluctuations. I want to highlight that net capital inflows to Chile are now less than the peaks we saw in the 1990s. Currently, capital inflows to the emerging world – particularly Latin America – have resumed pre-crisis levels but are still below those of the 1990s (figure 9).