In particular, that US growth would weaken and the European sovereign debt would propagate from the peripheral economies to other countries in the region. As months have gone by these risks have materialized. The crisis that broke out in 2008 has not finished. Although at first the policies applied around the world succeeded in averting immediate damage and an economic depression, there are still many issues that have yet to be resolved before it can be left behind. One such issue is the fragile financial situation of states, banks and households in several developed economies. In Chile, and in most emerging economies, we have been innocent witnesses of the crisis. It has posed new challenges to monetary and financial policy-makers to minimize the impact of external turbulences and allow our economies to continue along a path of sustainable growth. The experience of 2008–2009 taught us lessons for our policy conduct, but, more importantly, it left us the conviction, not only to policy makers but also to the general public, that we are able to mitigate the adversities coming from abroad. Avoiding them is impossible, but we can surely mitigate them. Chile’s macroeconomic policy framework leans on various pillars that must be tended to. To begin with, a fiscal policy that is serious and predictable. Keeping a budget rule based on the structural balance, which permits to shield public expenditure from economic fluctuations and also empower it to support domestic expenditure when needed, is highly beneficial. A second pillar is our high financial and commercial openness.
The risk of overheating and forex pressures Economic recovery continued over the course of 2010, but at the turn of 2011 we faced new macroeconomic challenges. Preoccupations again centered on world developments, due to tensions associated to the two-speed recovery. Emerging countries, with their output gaps narrowed or closed had to deal with their economies’ overheating and related inflationary pressures. Furthermore, they began having strong exchange rate pressures due to their better relative position in the world, capital inflows and the need for global imbalances to be resolved. Several economies’ exchange rates dropped to their lowest in the last decade (figure 9). Only very recently have we seen some reversal because of a terms-of-trade deterioration and increased risk aversion around the world. Chile has been no exception. Although in net terms capital inflows were not large, our currency also strengthened, not a surprise in a scenario of vigorous growth and very good terms of trade. The nominal exchange rate posted a significant appreciation toward the end of 2010, while the real exchange rate hit levels below the averages of the last 15 to 20 years (figure 10). The current exchange rate tensions originate in some long-lasting phenomena in the international economy. Global imbalances are still unresolved, and part of the solution requires that the countries that enjoy a better position today (i.e., emerging en commodityexporting economies) redirect part of their demand to those that are worse off – the developed economies.