People say: “things are looking down, so we'd better not spend,” so nobody spends, and it is this same public who, some time later, say: “I told you, things were looking down.” However, in this case, the loss of confidence has been definitely well-grounded on the relentless crisis the world is currently undergoing, but whose effects are being in turn worsened by this same loss of confidence. Confidence crises are hard to fight by using just traditional tools of economic policy. Confidence indicators of households and companies should bounce back up as months go by, as a result of sustainable and credible expansionary macroeconomic policies and objective communication about reality. In Chile, particularly, we are able to face this negative international scenario, thanks to our healthy economy and expansionary policies. BIS Review 41/2009  5  In our January monetary policy report (IPoM), we forecasted that, in the most probable scenario, the Chilean economy would grow between 2 and 3% this year. In such scenario, it was estimated that the GDP of our trade partners would grow 0.4%; however, after all the past months’ corrections, this figure is now estimated to have turned into a more than 1% decrease. As I said at the beginning, this is a major change of scenario, which will certainly affect the growth projections of our economy.
Quoting from his paper: “the future policy that one wishes for people to anticipate is one that the central bank will not have a motive to implement later, if it makes its decisions then in a purely forward-looking way, on the basis of its usual stabilization objectives.” (end  BIS central bankers’ speeches  1  quote) This does seem like a hard conundrum to get away from, and probably limits the traction of this type of tool as a strong driver of longer-term rates. Partly due to these limitations, Central banks have also directly tackled the term premium by purchasing large quantities of long-term assets. The idea is that by removing some duration from the fixed income markets, private investors’ aggregate exposure to interest rate risk is diminished, leading to a lower required compensation for bearing such risk. Of course, this logic relies on some form of imperfections and/or market segmentation, but there is by now significant evidence, including some excellent papers to be presented in this conference, that QE has had a measurable impact on long-term rates through this channel. A similar logic applies to the default risk-premium: to the extent that returns on safer debt are compressed by central bank purchases, investors are tempted to reach for yield into other fixed-income markets, such as mortgages, corporate bonds, and emerging market instruments.