This framework of macro/financial policies and institutions have allowed the country to take big steps in achieving economic stability, with inflation around the target, surpluses in fiscal balances and in the current account of the balance of payments in times of bonanza, the real exchange rate aligned with its fundamentals and output growing around trend. In addition, this framework of policies and institutions imprints a countercyclical character of fiscal policy and favors the use of countercyclical monetary policy. In particular, in this setting monetary policy reacts to deflationary effects of a weakened economy and vice-versa, so it naturally helps to stabilize the effects of demand-side shocks. In the present conjuncture, this macro/financial policy framework should favor the way the Chilean economy absorbs swings in the international scenario. Two factors contribute. First, with inflation expectations well anchored around the target, the disinflationary effect of idle capacity (i.e., a negative gap between output and trend output) originating in less favorable external conditions, would naturally lead to a countercyclical monetary policy. At the same time, the floating regime permits the real exchange rate to adjust to changes in the international scenario. Overall, depending on the size and on the inflationary effect of said adjustment, it could restrict monetary policy reaction. Therefore, the composition and transmission of the external shock is very relevant in the most adequate policy reaction. Second, fiscal policy, whereby spending is tied to permanent income of the government, largely eliminates the traditional pro-cyclicality that Chile has shown in face of shocks in the terms of trade.
Although this process of financial market normalization is part of a necessary correction, it is neither easy nor prudent to express what this correction will finally be like. What can be said with some certainty, however, is that volatility will be here for a while and will be associated to lost or reduced access to financing from non-banking financial institutions or even particular banks. The longer and deeper this adjustment, the larger the effects on financial markets and the world economy overall. The most likely final effects will be increased risk premiums (an inevitable or even healthy correction), a deeper and more prolonged adjustment in the US housing market, and some less economic growth in the US and in the world. Evidently, a deepening of these problems could be more hurtful for global growth and the commodity prices. This adjustment comes on after a long period of very expansionary monetary policies in industrial economies that had begun a normalization process. But still, one should not overlook the fact that this correction finds the world economy close to completing the best five-year growth period since the early seventies, with large commercial banks in a very solid position, enterprises with good profits and the main industrial economies with flexible exchange rate regimes, controlled inflation and central banks that have gained great credibility for their commitment to price stability.