ground at the moment is that a deterioration in global confidence, understood as a worsening of expectations and increased uncertainty around the world, has amplified the response to the initial impact, pushing us into a more acute and synchronized crisis than we could envision at first. it helps to study the historical relationships among the data if cycles and patterns tend to repeat themselves on a regular basis. but in the current crisis, which has no precedents in many decades, to look at simple correlations based on normal periods can be very misleading. from my standpoint, it is more important to conceptualize what is happening today, in order to analyze the prospects of the economy and draw policy conclusions. to address this subject i will use some basic economics that will allow us to understand the synchrony and severity of the current crisis. these arguments have been present for many years in the profession and have gained enormous importance today. the first refers to the existence of multiple equilibria and the effect of failed coordination. the second deals with the effect of uncertainty on economic decision making. these two elements help us understand how the confidence crisis that swept the world aggravated the output contraction, hitting hardest the demand for industrial goods. in the next section i will describe the main ideas that clarify the impact of the confidence crisis, and then analyze the international scenario in the following section. some basic ideas the objective here is to account for the basic ideas behind the coordination failures, multiple equilibria and how uncertainty affects aggregate demand. coordination failures let us assume a very simple economy 1 with a large number of consumers. each consumer demands d units of a manufactured good, which we can think of as a durable good ( e. g., car, house, appliance, electronic device ). we can also think of durable goods demanded by firms when they invest ( e. g., machinery and equipment, warehouses, plants ). the demand of consumers and firms is a function of their expectations of future income, directly related with the expected value of aggregate output in the economy. y will denote the level of output and ey its future expected value. we will also assume that the demand depends on the level of uncertainty which we will call σ and i will discuss later. for now, it is enough to consider that the demand falls when uncertainty grows. thus, the demand for goods is represented by d ( ey, σ ). firms, in this example, produce what is demanded from them. 2 normalizing the

stock volatility index ( vix ), which is normally used as a good indicator of uncertainty, 5 shows how it increased several times during the peak of the crisis in september and october of last year. the latest figures show uncertainty declining, although it remains high. thus, according to market consensus, world growth for 2008 - 2009 posted no significant changes between march and september of 2008 ( figure 5 ). the situation in chile did not differ much ( figure 6 ). during the whole of 2007, growth projections for 2008 fluctuated around 5 percent, even after the eruption of the housing crisis in the united states. at the time of bear stearns ’ bankruptcy there had been some adjustment in expected growth for the year, but in september there was even a slight correction upwards. the bank ’ s forecasts were similar. the growth projections for 2009 are not so different ; actually the larger part of the correction was done after december 2008. in sum, since september a significant correction has been applied to the expected value for growth. in addition to a smaller forecast for future earnings, there has been an increase in related uncertainty ( figure 7 ). in the united states, in early 2008, the width of the distribution of growth projections for 2009 was 2 percentage points. in early 2009, the same width increased to 2. 3 percentage points and, by may, with at least the data for the first quarter of the year available, the width was of 3. 3 percentage points. in chile, gdp projections taken from the economic expectations survey depict a similar picture, that is, the level of uncertainty among those forecasting growth has been increasing, despite the fact that, as the year passes and new data are added, the projections should not only be better but also have a smaller degree of uncertainty. what began happening in september 2008 that changed so dramatically the economic scenario around the world, chile included? as i said before, the simple observation of traditional transmission channels of an external crisis cannot explain the events. on one hand, financial conditions tightened significantly worldwide. the domestic financial system also suffered, although without any episodes that might compromise its solvency. however, the possibility of reduced access to external funds, plus the increase in global risk, put pressure on internal financial conditions, causing a significant increase in interest rates and lending standards. at the same time, when future earnings became more uncertain, households and firms significantly reduced their demand for new credit, as revealed by the banking credit survey that the central bank conducts on