With these two questions in mind, we will also explore the consequences of financial crises on unemployment, household credit, and the real economy, and will try to understand how markets operate in environments with multidimensional private information. Our last session will be devoted to analyzing the effects of unconventional policies in dealing with the impact of the recent financial crisis in Chile. I am confident that valuable lessons will come out of these two days of discussion. To begin, I would like to share my views and Chile’s experience in four issues that are currently in the policy debate and that will underlie the discussion we will be having over the next two days. The first issue relates to the debate on financial stability as a macro policy goal and which institutions should be responsible for it. I will then turn to the availability and usefulness of policy instruments to pursue financial stability. I will also refer to two aspects of our experience in conducting monetary policy during financial crises: our experience with unconventional policies during the recent global financial crisis and our experience with financial rescues in our own financial disaster in the early 1980s. In the latter case, I will also touch briefly on the impact of rescues on the Central Bank´s balance sheet. 1. Financial stability as a policy goal. The role of the central bank  The recent financial crisis challenged the paradigm that the stability of the financial system could be preserved through a combination of micro regulation and macroeconomic stability.
The financial soundness of a central bank, the usual lender of last resort in a country, is an important firewall for trouble in the financial system. While a central bank may count with the help of the sovereign, this channel may be a source of concern when sovereign themselves are facing problems, and it also raises some worries about the ability of the central bank to maintain its independence. There are also those who argue that, since the liabilities of central banks can be arbitrarily created, the financial position of a central bank shouldn’t matter. But this argument forgets that doing so may endanger the achievement of the inflation targets that many central banks have taken as their operational goals, affecting their reputation and independence. 2  4  Céspedes et al. 2012. BIS central bankers’ speeches  In 1982, as the debt crisis spread through Latin America, the Chilean financial system, which had channeled substantial foreign-currency-denominated syndicated loans, became largely insolvent. Under these conditions, the government engineered a massive rescue operation through the central bank where several of the most important banks became nationalized and others disappeared, after their assets were absorbed by other institutions. This intervention prevented an even larger collapse of activity than the one we ended up experiencing. The manner in which it was implemented, where shareholder equity was fully diluted and institutions assumed a subordinated debt to the central bank that took a long time to repay, helped maintain the rescue’s moral hazard concerns at bay.