This regime some times involves drastic exchange rate adjustments, which can be costly to many firms. The alternative is a more rigid exchange rate, where fluctuations in foreign currency supply are mirrored by fluctuations in domestic credit cost and availability, which can be very detrimental to the financial system’s soundness and to firms. More rigid systems simply put off real-sector adjustments, but in the meantime capital flows, credit availability for firms and inflation are all affected and eventually the value of the currency is eroded and the higher nominal exchange rate does not lead to a higher real exchange rate. On the other hand, a floating exchange rate allows more rapid adjustments and the next movements of the exchange rate are uncertain, preventing the market from betting on one direction. Thus we avoid repeating past mistakes and returning to the days where prospects of gradual appreciation artificially cheapened foreign borrowing and induced massive capital inflows. Another important factor in determining the exchange rate are pressures from fiscal policy. For more than twenty years, Chile has benefited from a responsible fiscal policy, using it counter- cyclically when the situation warranted. Questions of budget go beyond macroeconomic considerations but the fact is that in the present circumstances our economy has started to take off and does not require an additional boost from fiscal policy. The Finance Minister’s recent statement on the budget aims towards reducing the structural fiscal deficit and is fully coherent with assumptions in our latest Monetary Policy Report.
Current account deficits in the advanced world will no longer be what they were five years ago, and this implies also adjustments in the economies that had strong current account surpluses. All this is resulting in a global reorganization of world currencies. However, not all countries are contributing to this exchange reorganization and this generates tension in the workings of international currency markets. I do not wish to enlarge on this point but what is happening in Chile is happening in many regions of the world irrespective of the macroeconomic policy measures they have adopted. Four factors allow us to be optimistic about how Chile, as an exporting country, will be able to face these challenges successfully. In the first place, we have learned from our past and we have substantially reduced the harmful effects of copper price swings on the rest of productive activities. The danger of exacerbating commodity cycles is widely recognized so stabilizing macroeconomic policies are brought to bear. Secondly, a floating exchange rate discourages speculation and massive capital inflows; in fact, in Chile today there is no evidence of short-term capital inflows for this motive. Thirdly, exchange rate flexibility promotes the development of a hedging market (a mechanism practically unknown when there was a band-based exchange rate regime) and this is now a developing market. Access to this market is to be encouraged, especially for small firms, and any steps in this direction on the part of authorities are welcome.