the cycle on international interest rates will probably also be an increase in the volatility of those rates. coverage against interest rate volatility is an additional argument in favor of integrating the emerging country economies with that of the world. 4. monetary policy another by - product of the new information technology is the blurring of the traditional definitions of money. it is now clearly possibly for the non - banking private sector to create money substitutes on demand. this development will tend to render inefficient the regulation of limited definitions of money as a tool to influence economic activity and prices. if this is so, interest rates will reign unchallenged as a monetary policy tool, while inflation targeting will be in the forefront as a nominal anchor for the economy. by the way, under these conditions it will become extremely difficult to differentiate between financial and non - financial firms. until a greater synchronization of the cycle becomes evident, the need for an independent monetary policy will necessarily lead to floating exchange rates. as the cycle, or perhaps i should say if the cycle, becomes synchronized all over the world, the need for independent monetary policies may fade away. gradually, the number of currencies in the world will decrease through time. this is not economic fiction : a tendency in this direction is already present among smaller countries in latin america with large trade and investment relationships with the united states. however, a world tendency to a significant decrease in the number of currencies is probably a very long run one, where keynes ’ dictum on the long run comes to mind. in any case, i am convinced that, as rogoff argues in a recent paper, it may not be desirable to pursue currency consolidation all the way. meanwhile, in the short and medium run, the increase in productivity provides more room for monetary policy to maneuver. productivity growth alleviate inflationary pressures providing more room for monetary policy to exert its short run influence on the real economy. 5. flexibility the key word for an emerging economy in a changing world is flexibility : in exchange rates and interest rates, to accommodate shocks without concentrating their effects in one particular market ; in factor markets, both labor and capital, to minimize the cost of transition from one state of the economy to another. the task before us, in an emerging economy like chile, is to increase flexibility in all markets. we have been working on that in recent years following a careful, gradual approach, to make sure that we put in place the necessary

has prevailed for quite some time. on the domestic front, we estimate that risks for activity are unbiased. the economy has decelerated with respect to early in the year, which had been long expected. however, this deceleration could be more persistent if consumption fails to recover its expected dynamism. meanwhile, the rebound of investment could be stronger as other large - scale projects progress. as for inflation, we estimate that risks are unbiased. various indicators suggest that the economy will further consolidate the process of closing the capacity gaps, while others show the reaction of the more sensitive cpi components. thus, expectations two years out are aligned with the policy target. it should be noted that this new monetary policy report features greater insight of the implications of risk scenarios for monetary policy. this will allow having a better appreciation of the central bank ’ s reaction to deviations from the baseline scenario. this reflects the board ’ s purpose of enhancing transparency in the conduct of monetary policy and provide guidance to the markets and the community on its possible future evolution. summing up, we continue to assume that capacity gaps have been decreasing in recent quarters and will continue to do so in the next two years. in these circumstances, for inflation to converge to the target in the policy horizon, it is necessary that the monetary stimulus continue to be gradually withdrawn in the coming months. with this, we reaffirm our commitment to conduct monetary policy with flexibility, so that projected inflation stands at 3 % over the two - year horizon. a new supplement to the monetary policy report : the labor market the labor market plays a central role in the functioning of the economy, and is particularly important for monetary policy. in the short term, the way this market responds to shocks and adjusts employment and wages, is key in the behavior of variables such as activity, consumption and prices. in the long term, the labor market plays a crucial role in trend growth, because of both the evolution of the labor factor and its contribution to productivity growth. accordingly, the analytical framework of monetary policy has always paid special attention to the twists and turns of the labor market. in fact, this is a central axis in the conceptual framework modern monetary policy is based on, from the different notions of the phillips curve to the neo keynesian models of general equilibrium that today sustain our forecasting and analysis. with this in mind, we have attached to our december monetary policy report a special study on the functioning of the labor market. it is