developing countries makes this point even stronger, since it can also apply to inventory management and other forms of common productivity shocks since the asynchronicity is much more significant. however, reforms regarding monetary policy have lagged noticeably in their adoption among developing economies. central bank independence, inflation targeting and other related policy reforms have only materialized in developing economies beginning in the mid - 90s which coincides with the fall in volatility in this group of countries. while structural changes, such as the increased openness, may have indeed helped economies become more stable, these changes must also include those related to monetary policy because the great moderation coincides with inflation control, suggesting that improved monetary policy has indeed played a major role. so, the relevant question is exactly how does monetary policy reduce the volatility of both output and inflation. we know that there is a tradeoff between output volatility and inflation variability, and monetary policy attempts to manage this tradeoff optimally. policymakers have to decide how to reduce inflation to reach their goal. if they react forcefully to any inflation deviation, the outcome will be low inflation volatility, but large output volatility. thus, in the long run, there is a tradeoff between inflation volatility and output volatility, although inflation has no effects on the full employment level of output. it is also possible to practice inefficient monetary policy, one which lags behind the output / inflation volatility frontier, making both of these inefficiently large. bernanke argues that in such a scenario of inefficient monetary policy, the volatility of both output and prices can be reduced by moving to better policies. in other words, in the presence of an inadequate monetary policy, the outcome could be excessive volatility of output and inflation, and, hence, moving to an efficient policy can “ shift the tradeoff to the origin ” between output and inflation volatility, reducing both of them. in other words, improvements in monetary management can allow reaching an efficient frontier. for example, a monetary policy that reacts insufficiently to changes in inflation, without fulfilling the taylor principle, or a policy too optimistic on the full employment level of output, could end up generating unnecessary volatility and inflation. these are reasonable explanations for the conduct of monetary policy in the us before the 1980s ’ disinflation. this policy inefficiencies could be even aggravated by a

backward looking indexation or other type of inertia, will affect all prices through the cost channel, and hence, a pernicious dynamic of inflation will be noticeable in both headline and core inflation. indeed, a reasonable adjustment should have foodstuff and energy price inflation falling sharply after the relative price adjustment has taken place, and core inflation adjusting from a higher level to the target. once food and energy prices level out, the propagation of inflation could be a more serious problem for countries that focus its target on core inflation. challenges to monetary policy current inflationary shocks pose a serious threat to monetary policy. the recent adjustment has been uneven across countries. many have been trying to avoid the increase in prices via subsidies, taxes or plain price controls. however, it is by now clear that relative prices must adjust, given the persistency of the shock and the need for appropriate signals for efficient resource reallocation. on the other hand, there are countries, such as chile, where changes in costs are regularly passed on to consumer prices, because markets for foodstuff are globally integrated and competitive. hence, a large part of the inflationary shock has been already absorbed. however, we have continuously witnessed a flow of bad news on commodity prices, and inflationary shocks keep hitting us, but the benefits that the flexible inflation targeting regime brings in terms of price stability and credibility must be maintained. there is no doubt from the developing countries ’ perspective that this is an important conquest and cannot be abandoned, least of all in these difficult times. the world economy is in a very complex situation. it is far from the disastrous 1970s, but we are in the presence of a slowdown with high risks of inflation. we are at a moment in which monetary policy is put under a serious stress test that will be crucial in identifying future refinements in the policy frameworks. particularly important in the us and industrial countries is the interaction between price and financial stability. from a policymaker ’ s point of view, we must ensure that all the benefits achieved during the great moderation phase are preserved. it would be irresponsible to return to times of instability while searching for short - lived gains. references ahmed, s, a. levin and b. wilson ( 2002 ), “ recent u. s. macroeconomic stability : good policies, good practices, or good luck? ”, board of governors of the federal reserve system, international financial discussion paper 2002 - 730. ball, l. and n