Such a spiral in Spain would only exacerbate the pernicious effects of the current shock, since, in the present context, a simultaneous rise in prices and wages would erode our external competitiveness vis-à-vis other euro area countries and would aggravate the already harmful effects of the current shock on competitiveness, employment and economic growth. Further, were it to spread across the euro areas as a whole, such a feedback loop would require a more aggressive normalisation of the ECB’s monetary policy to ensure compliance with our price stability mandate. In my view, an incomes agreement, like the one I have been advocating since October, is warranted in order to ward off these scenarios. But what shape should this cost-sharing agreement take? In my view, this burden-sharing should be set out in an agreement forged under the framework of social dialogue (which we have termed an “incomes agreement between firms and workers”). However, I believe it should be defined based on certain general principles. I will specifically mention five that I feel are particularly important. First, the costs must be shared among all agents. In an extreme scenario in which firms attempt to keep their unit profits intact, a reduction in household purchasing power would ultimately translate into lower demand for firms’ products. At the other extreme, maintaining workers’ full purchasing power would pose a threat to firms’ capacity to generate sufficient funds to conduct their investments and, ultimately, would jeopardise their survival, to the detriment of employment and welfare.
In addition, the latitude of changes in regulation is much more limited than that of interest rates. A more constructive approach may be to design rule-based countercyclical regulation with a clear purpose to minimize the risk of financial crisis. Nevertheless, we still need to learn more about the interactions between monetary and financial policies. Final remarks A natural reaction to a crisis is to think that everything is wrong and that all must be changed. Emerging markets, and in particular Chile, performed well during the crisis, and above all during the recovery. Therefore, a first lesson must be on the factors that produced these good results, and macroeconomic management was certainly central to the rapid recovery. The financial system was resilient, which shows that the regulatory framework was appropriate. However, our role is not to congratulate ourselves for our achievements in the past, but to look at strengthening our macroeconomic framework. As development proceeds, new challenges arise due to financial innovation, and it is extremely important to look for lessons while the crisis unfolds, to take advantage of financial development without risking financial stability. There is a need to study the interactions between monetary and financial policies further, especially given the challenges stemming from the global outlook. Implementing monetary policy in a flexible inflation targeting framework has shown its benefits; incorporating financial frictions and the appropriate policies should help us to navigate better in a very uncertain world.