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The captain.

It's understood that fiscal transparency and discipline has been a pillar of stability for the Chilean economy. But an effective monetary policy, in combination with public-spending restraint, is the real driver behind the country's solid growth numbers. Since May 2003, respected economist Vittorio Corbo has stood solidly at the helm of Chile's Central Bank. A longtime academic at both US. and Chilean universities and advisor to international agencies such as the World Bank, Corbo shared his perspectives on current Chilean and Latin American economic performance with LATIN TRADE Chile Correspondent Eduardo Coronado.

Some economists, among them Chilean Sebastian Edwards, warn of a slowdown in Latin America in the short term from an eventual world recession led by the United States. What is your opinion?

It's possible, but the probability of that is limited. It's more likely that in 2006 the global economy will have another good year. The main risks in this scenario are even greater increases in oil prices; the effect on consumption, investment and asset prices from an eventual increase in long-term interest rates from the surprisingly low levels of today; and how the United States goes about resolving its high current-account deficit.

You once pointed out Chile's immunity to foreign contagions is due to it being a low-risk country with high public and private savings rates and a flexible exchange rate. Could high oil prices and imbalances in the U.S. economy nevertheless become a serious risk?

We are better prepared today to face these kinds of risks. That doesn't mean Chile won't be affected, should they occur. What I have said is that the effects of these events should be much less than in the past.

Controlling inflation has been a big worry for the Central Bank--its goal is to limit inflation to 3% annually--a path also taken by other monetary authorities in the region. Why has that strategy been the most successful, rather than other monetary policies, such as greater attention to money flows?

The inflation-targeting method that Chile and various other countries have introduced in the last 15 years has proven to be a very successful mechanism for reducing and keeping inflation in check. Its main advantage, compared to alternatives based on controlling monetary aggregates, is that it doesn't rely on a mechanical relationship between the instruments you use and the target but on the credibility of the bank in regards to that objective. Strategies based on monetary control are critically linked to the relationship between money and inflation, which has been shown empirically to be a weak tool in terms of the relevant time frames. In fact, because of this, most countries have abandoned the use of monetary aggregates as a way to control inflation.

At a recent international seminar, you said that the inflation-targeting method is "coherent with the modern view of the limits and power of monetary authorities." Could you elaborate?

The modern view of the limits and power of monetary policy is that its main role is to achieve and maintain a low and stable inflation rate. Trying to use monetary policy to permanently reduce the unemployment rate to below what would be a normal unemployment rate for a given labor market ends up accelerating inflation and, as a result, slows economic growth. In the short term, monetary policy does have a role in stabilizing economic output in relation to potential output due to the numerous rigidities in nominal prices.

Chileans will in December elect a new president. Are you confident that the next government will maintain its current fiscal stance, given the importance macroeconomic stability has played in the country?

In Chile there is a general acceptance of the importance of macroeconomic stability. It is accepted across the political spectrum. It will be the responsibility of the incoming administration to define the practice and institutionality of the matter, but it is very likely that things will remain very similar to the way they are now.

The International Monetary Fund has suggested the possibility of institutionalizing the government's commitment to a public sector surplus of 1% GDP (known in Chile as the fiscal rule). Does this seem like a way to conduct monetary policy in the medium term?

Each country is sovereign in choosing its fiscal institutionality. Fiscal responsibility is essential, and Chile has a long history of this. That has strengthened in the last five years because of the fiscal rule, something put in place by the current administration. Establishing an explicit rule in the medium term could make even more credible an already successful way of managing public spending.
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Title Annotation:Vittorio Corbo, economist
Author:Coronado, Eduardo
Publication:Latin Trade
Article Type:Interview
Geographic Code:3CHIL
Date:Sep 1, 2005
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