Additionally, we are confronting new risks, in the face of international tensions related to Iran’s nuclear situation and its impact on the oil market. These sources of uncertainty are beyond our control. Therefore, our role as policymakers in emerging countries is to preserve flexibility and space for policies that will enable us to respond to and buffer the financial and real effects that those risks pose on our economies. Over the last years we have gained credibility, flexibility and space to implement a macroeconomic and financial policy framework that will help us smooth out the economic cycle. This framework rests on four pillars. First, monetary policy management is based on a flexible inflation-targeting regime, conducted by an autonomous central bank and supported by a floating exchange rate system. Second, a fiscal policy that is accountable and predictable thanks to a structural balance rule. The significant amount of savings accumulated during the run-up of copper prices was a crucial factor in bolstering the resilience of the Chilean economy and in providing a countercyclical fiscal boost. Third, a high degree of commercial and financial integration with the rest of the world. Finally, a sound financial system, with globally integrated, well capitalized, and adequately-regulated banks. These elements allowed us to be less affected by the Great Recession than by previous episodes. In Chile, the effects of the world slowdown of the second half of 2011 and the financial turbulences coming from Europe have so far been limited.
So far this year, it has bought currency for 30 b.kr., as opposed to 21 b.kr. over the same period in 2014. If it maintains that pace, it will buy more currency in 2015 than in 2014. As a result, the reserves exceed the outstanding foreign-denominated loans taken to finance them – by 65 b.kr. as of the end of February. But we mustn’t rest on our laurels; we need sizeable reserves as we prepare to lift the capital controls. I mentioned uncertainty surrounding the estimation of potential FX outflows once the controls are lifted. But one thing is certain: if the failed banks’ estates were given a green light tomorrow and could convert all of their krónur to foreign currency, and the same happened with the offshore overhang, there is no way we could safeguard stability, let alone bolster confidence, except perhaps after a long time has elapsed. The Central Bank of Iceland has designed a model intended to assess the impact of various developments in the balance of payments over a long horizon, including capital account liberalisation measures. When applied to this instance, the model reveals that our entire foreign exchange reserves would be wiped out – and more besides – if they were used to shore up the exchange rate. This would never be done, of course, and therefore the currency would depreciate sharply.