A credible inflation target with a flexible exchange rate regime should help to avoid the problems we faced during the 1990s. Indeed, during the period of large capital inflows, no monetary policy in Latin America operated under a full-fledge inflation targeting regime, and most countries had some form of exchange rate rigidity. Despite having a flexible exchange rate and an inflation target in place, the effects on the exchange rate could reflect that domestic asset prices could be forming a bubble. In this case, sterilized intervention, without an explicit objective on the level of exchange rate, can also help. I already discussed some principles to guide sterilized intervention within an inflation targeting framework. A much debated proposal is the use of capital controls. The  5  In addition, a traditional concern is that with the same speed as capital flows in, capital may flow out, generating costly adjustment processes. See Cowan et al. (2007) for a review of sudden starts and sudden stops around the world. Sudden stops of inflows are as common in developed as in emerging countries, but in the former, the sudden stop tends to be offset by a return of domestic capital invested abroad, while in the latter it results in a severe squeeze in the capital account. Accumulation of reserves or another form of insurance should help to avoid large swings. BIS Review 113/2009  5  evidence on their effectiveness is elusive.
Figure 1 Monetary policy and housing prices Monetary policy  Housing prices  (percentage)  (nominal index, first quarter 2001=100)  15  15  250  250  12  12  200  200  9  9  150  150  6  6  100  100  3  3  50  50  0  0  0 90  93  96  U.S. Chile (*)  99  02  05  Canada  08  01  02  04  05  Australia Chile Canada  07  08  0  U.S. Spain  (*) Starting August 2001, the MPR is set in nominal terms. Previously, it was set in inflation-indexed terms. Sources: Central Bank of Chile, Bank of Canada, Bloomberg and U.S. Federal Reserve. 10  BIS Review 113/2009  Figure 2  Nominal exchange rate  (CLP/ USD) 700  700  650  650  600  600  550  550  500  500  450  450  400  400  Jan.08  Apr.08  Jul.08  Oct.08  Jan.09  Apr.09  Jul.09  Source: Central Bank of Chile.