economy, the main risk continues to be the situation in the eurozone. on one hand are the difficulties in implementing agreements. on the other, like i said, as time has passed, the economic situation of the most affected countries has complicated further, while core european economies seem to be taking a turn for the worse. a sharper deceleration in germany or france could aggravate the problems in the region and amplify pass - through channels to other economies. neither can this analysis rule out episodes of volatility in the financial markets that could be more severe than the ones considered in the baseline scenario. however, the potential effects on chilean banks of a deepening of the crisis in the eurozone are still bounded. while banks ’ profitability and solvency indicators have dropped most recently, stress tests show that the banking system ’ s level of capital is appropriate to absorb the losses caused by a risk scenario of this kind. another risk is the ongoing discussion in the united states to ward off a sharp fiscal adjustment in 2013. failure to reach an agreement could significantly hamper growth and increase market volatility. and central banks of developed economies have continued to boost, and even intensify, very expansionary monetary policies, which can bring consequences on capital flows, asset prices, currency parities, commodity prices and credit growth in the other economies, including chile. so far the domestic effects of these policies have been limited, but they are certainly a source of concern. finally, in the emerging world, the biggest risk continues to be the pace of economic activity. incoming data indicate that china has resumed strong growth, but the weakening of europe and pending discussions in the united states could affect the chinese economy, and through it the emerging world. chile would be especially affected because of its incidence in the determination of the copper price. in addition, the recent drop in world trade growth figures is cause for concern. in chile, despite particularly low inflation, medium - term inflationary risks remain present. the sustained dynamism of chile ’ s economic activity has intensified the use of installed capacity, and a strengthening of domestic demand could trigger inflationary pressures incompatible with the inflation target. so far, inflation has remained bounded and has even decreased. our evaluation is that the recent drop is a transitory event that will be gradually reversed within the next few quarters to return to levels around the central bank ’ s target. behind its recent performance there may have been factors such as compressed trade margins, increased mean

60 years and our country, despite being in an excellent position to address these shocks, has not been spared its consequences. but today, our fiscal policy has been able to make an important reactivation effort, thanks to the prudence with which the years of high copper prices were managed. the other critical elements in our macroeconomic policies that favor stabilization are monetary and foreign exchange policies. although they play a somewhat more subtle role than fiscal policy, they are no less important. in the first place, a credible inflation - targeting regime ensures the proper reaction of monetary policy to significant deviations of output from its full - employment level. in particular, negative demand shocks that may come from worsened external conditions should be accompanied by a reduction of the monetary policy rate to prevent a deanchoring of inflation expectations and allow the economy to stabilize without suffering unsustainable, and costly to revert, contractions. this is especially visible today that the central bank board has reduced the monetary policy rate by 775 basis points, placing it at its minimum level of 0. 5 %, and has complemented this reduction with additional measures to boost the monetary impulse. a second key element in this scheme is the floating exchange rate. this policy favors stability, allowing the real exchange rate to adjust to internal economic conditions and minimizing output adjustments. oftentimes, persistent attempts to prevent the exchange rate to adjust to market conditions may encourage excessive capital flows and abrupt foreign exchange adjustments that may complicate the conduct of monetary policy ( figure 9 ). thus, the flexible exchange rate we have in place facilitates the adjustment as long as it is combined with a consistent macroeconomic policy and a solid and resilient financial system, as we have in chile. if fiscal and monetary policy were inadequate, exchange rate fluctuations could occur that would exacerbate macroeconomic swings. in any case, our current foreign exchange scheme contemplates the possibility of intervening in the market under exceptional circumstances, which we have done in the past. in summary, the combination of a flexible exchange rate, a prudent fiscal policy, a solid financial system and a monetary policy based on inflation targeting, contribute to stabilize the economy, and particularly to reduce the impact of copper price fluctuations on domestic activity. the economic and social stabilization fund and the pension reserve fund. conclusions the effect on economic growth of natural resource abundance has been at the center of the world ’ s economic debate throughout the years. this issue is also greatly important for chile,