The less sloped straight line is an iso-loss line that corresponds to equal weight on inflation and output-gap stabilization, that is to a “lambda” equal to one. 4 With such equal weight, the high policy-rate path is preferred. The steeper straight line corresponds to lambda equal to 0.3, that is, with a weight on output-gap stabilization equal to 0.3 relative to the weight on inflation stabilization. With such a weight, the main policy-rate path is about as good as the higher and clearly better than the lower policy-rate path. At the time, Norges Bank had announced that its decisions were consistent with a relative weight on output-gap stabilization equal to 0.3 and a relative weight on interest-rate smoothing of 0.2 (Bergo 2007 and Holmsen, Qvigstad, and Røisland 2007). With some weight also on interest-rate smoothing, the main policy rate is best. The use of the mean squared gaps is one more step towards more systematic and transparent inflation targeting, in which central banks can be evaluated and held responsible for their decisions with even greater accuracy than before, following the introduction of numerical inflation targets, published forecasts of inflation and the real economy, published policy-rate paths and other important steps taken in the development of a systematic and transparent monetary policy. References Adrian, Tobias, and Hyun Song Shin (2010a), “Financial Intermediaries and Monetary Economics,” in Friedman, Benjamin M., and Michael Woodford (eds. ), Handbook of Monetary Economics, Volume 3, Elsevier, forthcoming.
Risk management aims precisely at identifying potential contingencies, appraising them and adopting adequate preventive measures to avoid their materialization as much as possible, as well as having in place timely response plans to correct or mitigate the impact of such contingencies as they occur. Our experience at the Central Bank of Chile At the Central Bank of Chile, we are in constant search for improvements in integral risk management, understanding that it adds value to business processes by helping to prevent, among other things, interruptions in operations and damage to reputation. For risk management, we have a corporate governance structure headed by the Board, Senior Management, a committee of independent experts (the Audit and Compliance Committee) and the Risk Committee, which promotes the framework for the management of risks that may affect the Bank's ability to achieve its mission, its vision and its strategic objectives. While risk-oriented functions had been in place for quite some time, in 2019 the Bank created a unit to cover strategic, financial and non-financial risks (Corporate Risk). Issues that have been addressed since then include comprehensive and consolidated  1/3  BIS - Central bankers' speeches  risk assessment, having an appetite and tolerance statement, and incorporating the Corporate Risk unit, in an advisory role, into the process of analyzing strategic portfolio decisions in the decision-making process in the policy area. We have recently made public the Strategic Plan that will guide our institution in the fiveyear period 2023-2027.