of excellent economists and professionals have contributed to the design of monetary policy, a better understanding of our economy, and to administering an institution to which the country has entrusted great responsibility and to which we have an enormous obligation of excellence. thank you very much. table 1 evolution of the central banks'autonomy index and inflation ( * ) i. late 1980s autonomy index political economic average inflation economies advanced emerging developing 5. 3 % 18. 6 % 22. 5 % 0. 39 0. 27 0. 27 total 0. 59 0. 38 0. 45 0. 48 0. 32 0. 35 ii. 2003 average inflation economies advanced emerging developing autonomy index political economic 2. 1 % 7. 0 % 8. 4 % 0. 74 0. 47 0. 29 total 0. 81 0. 75 0. 67 0. 77 0. 61 0. 48 ( * ) countries with annual inflation above 100 % were deleted from the sample. sources : arnone et al. ( 2007 ) and imf. figure 1 drop in inflation and change in the autonomy of the central banks * % drop in inflation - 0. 2 - 0. 1 0 0. 2 0. 4 0. 6 - 0. 3 - 0. 5 - 0. 7 - 0. 9 - 1. 1 change in independence index ( * ) drop in inflation corresponds to the percent variation of average inflation between periods 1980 - 1989 and 2000 - 2008. change in the independence index corresponds to the change in arnone et al. ( 2007 )'s autonomy index between the late 1980s and 2003. sources : imf and arnone et al. figure 2 growth volatility in chile, 1911 - 2010 ( * ) ( standard deviation of the growth rate ) 18 % 15 % 12 % 15. 0 % 11. 5 % 12. 0 % 9 % 7. 5 % 7. 3 % 5. 1 % 6 % 2. 9 % 3 % 0 % 6. 9 % 3. 6 % 2. 2 % 1911 - 1921 - 1931 - 1941 - 1951 - 1961 - 1971 - 1981 - 1991 - 20011920 1990 2000 ( * ) 2009 - 2010 based on the ipom of september 2009. source : central bank of chile. figure 3 percentage drop in the mpr between september 2008 and september 2009 and central bank independence % drop in mpr ( 09. 2008 09. 2009 ) 1. 0 0. 9 0. 8 0. 7 0. 6 0. 5

its growth. there is abundant evidence of the harmful effects of inflation on long - term growth ( barro, 1995 ; de gregorio, 1995 ). but, why does inflation tend to be higher when the central bank is not autonomous? to begin with, there is a need for public expenditure financing. there are various reasons why there is always pressure to increase public spending. many of them are well - known and it is beyond the purpose of this presentation to discuss them. the truth that this tendency to raise public spending combined with the fact that the inflation tax is easy to collect, creates a natural pressure towards higher inflation. numerous episodes where fiscal objectives have dominated price stability goals have resulted in significant inflationary spirals, which are very costly for society. this fact is wellknown in chile and in the rest of our region. a second element behind the inflationary bias has to do with the so - called dynamic inconsistency problem. in parallel with the tendency of the government to increase public spending comes the incentive to boost economic activity above sustainable levels. there are several reasons for this to occur. potential market failures may result in a less than socially optimal output level, or political cycle motives can lead the central bank to try to boost economic activity beyond the level believed to be sustainable in the medium term. how can the government ( the central bank ) generate a higher output level? by surprising economic agents with a higher than expected inflation rate. the inflationary surprise increases aggregate demand and output. however the public fully understands this situation, so the final result will be higher inflation and output at the same level as it would have reached without the inflationary surprise. inflation cannot generate permanent increases in output. in other words, more inflation is created but not more activity, which reduces welfare. granting autonomy to the monetary authority has been a way to establish a credible commitment with price stability while, at the same time, allowing it to implement a monetary policy that helps to smooth the business cycle. to the extent that the central bank is independent of the government ’ s financing needs, the inflationary bias that is attributable to financing a recurring public deficit will be eliminated. in addition, increasing the horizon of a central bank, which is related to greater independence, reduces the dynamic inconsistency problem because its interaction with economic agents is repeated over time. within this context, the central bank ’ s reputation acts as a self - regulating mechanism for its behavior. therefore, the longer the planning