So the relative weight of past inflation, the exchange rate, wage inflation, market expectations and output gaps in inflation dynamics may differ significantly from advanced economies. Chile has pioneered monetary policy innovation in the emerging world. After four decades of double-digit inflation, our Central Bank was given independent status and a mandate of price stability nearly 30 years ago and exercised it swiftly, with the support of a first version of inflation targets in the early 1990s. The monetary policy framework further evolved after the Asian Crisis to a fully-fledged forward inflation targeting regime with a floating exchange rate in 1999. This was soon complemented by a major upgrading of monetary policy communications and a structural fiscal policy rule. 2  Central Bank of Chile October 2018  This framework has basically remained in place for the last 18 years and its effectiveness has improved as markets, agents and institutions have adapted to it. Over time, markets have developed adequate FX hedging mechanisms, inflation expectations have become more anchored at the monetary policy target level, the Central Bank has overcome fear of floating, financial markets have deepened and the labor market has gained some flexibility. As an open economy, we are not immune to external shocks but the ability to cushion them through the exchange rate and countercyclical policy response has improved significantly. At the time of the 2007 Global Financial Crisis, this framework helped us to avoid large costs and contain financial problems despite our strong ties with the global economy.

In the aftermath of the Global Financial Crisis, the local currency depreciated around 45 percent in seven months, while the monetary policy rate was reduced from a relatively high level of 8.25 percent in December 2008 to a 0.5 percent in July 2009, where it stayed for about a year. Together with lowering the interest rate, the Central Bank implemented a program of liquidity provision that significantly reduced the market interest rates to a level much closer to the monetary policy rate. The active monetary policy response, together with an expansionary fiscal policy, facilitated a speedy adjustment. After only one year of negative annual growth in 2009, the economy was able to sustain growth rates above 4 percent in the years that followed. The inflation rate fell well below the target range for about a year, but inflation expectations remained anchored at the 3 percent target in the two-year horizon. Undoubtedly, this is the strongest countercyclical macroeconomic policy response we have ever articulated, proportional to the magnitude of the shock, but our monetary policy framework has also been useful to face subsequent challenges at home and abroad, like the end of the commodity price boom in 2013-2014, delivering lower price and output volatility. In each of these episodes, anchored inflation expectations, automatic fiscal stabilizers, foreign exchange hedging, and a sound financial sector have contributed to provide monetary policy with sufficient room for maneuver. But it is crucial to remark that these factors are not exogenous to macroeconomic policy.