In Australia, for example, this adjustment had already begun at the end of 2012 with the postponement of investment projects in iron or coal. Peru and Chile saw their adjustments in the second half of 2013. On the financial side, the normalization of international financial conditions has resulted in greater market volatility in emerging economies, together with higher risk premiums and capital outflows, plus a depreciation of their currencies against the U.S. dollar. In Chile, unlike past episodes, the effects on domestic financial markets have been bounded. The long-term rates have fallen while the money market has operated smoothly, and the risk premium is close to or only marginally above its levels of a while back. The exchange rate has absorbed the shock to terms of trade and the tightening of international financial conditions. Actually, the depreciation of the Chilean peso is among the highest in emerging economies. From a year ago, the currency has depreciated around 17% against the U.S. dollar, and the real exchange rate (RER) did by about 15%. This depreciation of the currency, in any case, is a desired effect, since it means an adjustment of relative prices and thus contributes to rebalance the sources of growth across economic sectors. In fact this is consistent with the macroeconomic framework that Chile has in place. Short- and long-term interest rates have declined while the currency has depreciated. In this scenario, inflation in Chile has returned to near 3% and medium-term expectations are in line with the target.
Some time ago, when we had more rigid exchange rate systems, less adapted to cope with external shocks, when confronted with tighter external financial conditions, we needed to fight against the depreciation of currency to avoid destabilizing balance sheet and inflationary effects. We had to tighten monetary policy to reduce the speed of private capital outflows and sold massive amounts of foreign reserves to contain the depreciation of the currency. Most experiences ended badly. Final remarks The changes we are seeing in the world economy are part of the development that comes in the footsteps of the global financial crisis. The time has come for the recovery of developed economies, and therefore, the extraordinary monetary stimulus packages they brought about in the past must be withdrawn. By historical standards, the global financial conditions we faced in the past few years were very good, but we knew that sooner or later they would end. This is a healthy development. What is important is where this new situation will find us, as economies that managed to keep strong fundamentals and prevented macroeconomic imbalances from building up, or on the opposite lane. How costly a moving toward a “more normal” world will be for each of our countries will depend on how wisely we have administered our economies during the good times. In Chile, the policy framework that has been in place during the recent decades, has given us more tools to help the economy to accommodate the effects of changes in the external environment.