José De Gregorio: Policy responses to the global crisis Presentation by Mr José De Gregorio, Governor of the Central Bank of Chile, at the conference “Monetary Policy and Central Banking in the Post Crisis Environment”, Santiago, 17 January 2011. *  *  *  In the last years economic policymakers have had to deal with many unprecedented challenges. The severe inflationary shock that began in 2007 was followed by the worst financial crisis since the Great Depression and the deepest worldwide economic recession in the postwar period. Currently, even though recovery is underway, the rebound in economic activity has been characterized by a dichotomy: whereas emerging countries are posting strong growth rates, in the developed world activity is sluggish, with high unemployment rates and excess capacity. This bifurcated economic scenario has brought many tensions to the global economy. In Chile, to the shocks that have affected the world economy in this period, one has to add the earthquake and tsunami that hit our country almost a year ago and that had both short and medium-term effects on our economy. One of the main lessons we have learned these years is the importance of having a robust policy framework. In the case of Chile, institutional developments, low level of public debt and high availability of liquidity allowed unusual vigor in monetary and fiscal policy to confront the negative effects on demand and output of all the shocks that have affected us.
As I will explain later, the Treasury Market Practices Group has updated its best practices to emphasize the importance of supporting market liquidity as well as avoiding automated trading strategies that create a false impression of market price, depth, or liquidity. In conjunction with those best practices, the TMPG also released a white paper on automated trading that reviews several categories of associated risk, including operational risk, potential systemic counterparty risk, market manipulation risk, and transmission risk. October 15 Let me now turn to the unusual events of October 15. On that day, Treasury yields exhibited extreme volatility, with the benchmark ten-year yield trading in a range of about 35 basis points between the market open and close. This included a sharp decline in yields following the U.S. retail sales report at 8:30 ET that morning, and a highly unusual round-trip in yields just after 9:33 a.m. At that time, the ten-year yield fell about 15 basis points in a five-minute period, before nearly fully retracing that move in roughly the same increment of time. That very short “event window” was a remarkable occurrence in one of the world’s most liquid markets, and likely reflected a unique dynamic on what was already an unusual day. Indeed, the net change on the session as a whole was less than 10 basis points – a small fraction of the extraordinary intraday range that we are still discussing today (see the chart).