BIS central bankers ’ speeches 1

Welcome to the 15th annual Conference of the Central Bank of Chile, this time focusing on “Capital Mobility and Monetary Policy”. In this address, I will discuss the challenges of dealing with macroeconomic and financial instability in the context of inflation targeting in emerging economies and analyze the special case of capital inflows as a source of such macroeconomic and financial instability. The monetary policy framework based on inflation targeting and exchange rate flexibility has been successful in providing price stability and the conduction of countercyclical monetary policy over the last decades. Perhaps precisely because of this success, the “separability view”, that takes price stability and financial stability as independent goals, was the preferred policy framework before the global crisis in those countries that explicitly pursue financial stability as a policy goal.1 Nevertheless, the recent crisis and financial turmoil resulted in increasing awareness of the linkages (spillovers) between macro and financial stability, both at the national and the international level. This calls for a revision of this view.2 In my remarks today, I would like to start by discussing some general issues regarding the linkages between price and financial stability and the linkages between monetary an