Preface

Over the years Chile has established a well-deserved reputation as a leader among emerging economies in the design and adaptation of sensible macro- and micro-economic policies. A stable and transparent policy regime now underpins an environment in which the private sector is free to act as the engine of growth in an open and liberalized market economy. The results speak for themselves: strong growth through much of the 1990s and resilience in the face of the current difficulties being created by the weak world economy and problems elsewhere in Latin America.

This important series of volumes underlines the importance that policymakers in Chile place on an intellectually rigorous and open-minded approach to their art. The topics they cover range widely: from monetary and exchange rate economics to financial markets; and from the international financial architecture to the behavior of saving and growth. Good policies in each of these areas are important not only to Chile, but to all countries – developed and developing – that choose to participate in an increasingly globalized world economy.

The growth of international capital flows has increased the stakes for policymakers. Sizeable capital flows raise the potential payoff when policies impress investors, but magnify the losses when policies are inadequate. That in turn means that countries should redouble their efforts to limit their vulnerability to shocks by strengthening their domestic policy frameworks.

In addition to original research carried out or sponsored by the Central Bank of Chile, these volumes contain contributions from a wide range of leading academics and researchers from other central banks, international institutions, and private think-tanks. The distinguished authors include academics and central bankers from industrial and developing countries. They bring an enormous range of experience and insights to bear, in articles which combine analytical work, country case-studies, and empirical cross-country research. There is no substitute for in-depth empirical analysis of country experiences when trying to frame good policy advice for particular cases.

Inflation targeting – the subject of volume five – is a good case in point. It is now more than a decade since inflation targeting was pioneered in New Zealand and Chile. Since then it has been taken up by countries as diverse as Brazil, Sweden and the United Kingdom. This provides us with much to learn from in deciding when and where inflation targeting is an appropriate regime for monetary policy, and how it can be made to operate most effectively.

The empirical analyses of Chile, New Zealand, Australia and Brazil cited in the volume confirm that inflation targeting can help countries pursue price stability without suffering large swings in output and growth. But success depends on the credibility and consistency with which it is pursued. To that end, one important benefit of inflation targeting is that it forces the central bank to be transparent about its objectives and how it is pursuing them. This in turn makes policymakers more accountable for their actions and spurs them to improve their performance. This is a lesson that can clearly be applied more widely.

Experience with inflation targeting also indicates once again that our notions of what constitutes "good policy" have to be tailored to the particular circumstances of the country in question. Not every central bank can implement inflation targeting with the technical sophistication – and multicolored illustration – of the Bank of England. But that does not mean that it is not worth doing. Analyses of experience with capital account liberalization teach a similar lesson. It is no coincidence that every leading industrial country has a liberalized capital account regime and seems perfectly happy with it. But recent history shows the problems that can arise when emerging markets move in that direction too quickly and without an appropriate policy framework.

Another important lesson is that state-of-the-art policymaking in one area is pointless if policies in other areas are inconsistent with it. Inflation targeting by an independent central bank can easily be undermined by lax fiscal policy or inappropriate intervention in foreign exchange markets, for example. In Chile the authorities view economic policy as resting on three pillars: a conservative macroeconomic stance, based on clear rules for monetary and fiscal policy; sound and market-friendly arrangements for supervision and regulation; and social policies focused on reducing poverty through investments in human capital.

The benefits of consistency within and between these three pillars are obvious. Stability-oriented macroeconomic policies can create a supportive environment for economic growth and poverty reduction. Transparent and market- friendly regulation and supervision can encourage investment and help ensure a stable and efficient financial system. And improvements in human capital can reduce poverty directly and over time increase the size and efficiency of the economy. The whole is strong when each of the pillars is strong.

Chile has not got all the answers. And neither has any other country. Policymakers everywhere must be open to the lessons they can learn from their counterparts in other countries, and willing to admit that what might have been the right answer in the past will not necessarily remain so as circumstances change. In searching for the right answers, I am sure that the insights and analyses in this new book series will be of great value in developing and industrial countries alike.

Anne Krueger
First Deputy Managing Director
International Monetary Fund