reforms is weakened due to meager growth prospects. the recent episode of cyprus is a case in point. italy also deserves special concern, because of the size of its public debt and its weight in the european banking system. new stress episodes in international financial markets could lead to adjustments in the prices of financial assets and commodities, and in global growth prospects. in particular, a sharp and persistent decline in copper prices originating in real or financial factors would have significant effects on the current account, domestic demand and inflation. the emerging world is facing big challenges in the conduct of economic policies in a scenario that foresees that the strongly expansionary monetary policy of developed economies will continue for a long period. this, because of the possible effects of interest rate differentials between emerging and developed countries on capital flows, asset prices, credit growth and currency behavior. currency - related tensions may create frictions that may hamper international trade and world growth. the greatest risks have to do with the persistence of highly dynamic domestic demand. on one hand, the economy is already using its internal resources intensively, so if the current expansion of domestic expenditure continues, it could generate, in the medium term, additional pressures on the labor market, the use of installed capacity and inflation. on the other hand, because of its incidence in the behavior of the current account deficit and its potential impact on the vulnerability of the chilean economy. any sudden change in external conditions, say, a reduction in the terms of trade or unfavorable financial conditions, could expose the country to costly adjustments. history provides several episodes of this nature. while the chilean economy has refined its economic policy framework to make it more resilient to external shocks, and both the funding of the current account deficit and the destination of its resources mitigate these risks, it is essential to prevent the incubation of imbalances. the opposing forces facing monetary policy remain. some external risks have eased, but the european situation is delicate. inflationary risks in the medium term remain in place due to strong demand. the mpr is within an estimated neutral range, but its current level is high by international standards. ( figure 8 ). interest rate differentials with the developed world pose challenges for policy making in emerging economies, including chile. the board follows closely the evolution of the external and internal macroeconomic scenarios and their impact on inflation, and reiterates its commitment to conduct monetary policy so that projected inflation stands at 3 % over the policy horizon. allow me

that asset price bubbles do not necessarily cause a financial crisis, as was the case with the tech bubble in the early 2000s. the bad combination is asset price bubbles with high leverage in the banking system. however, monetary policy played a role in the crisis in the way it dealt with bubbles, deviating from the prescriptions to pursue price stability. this was the so - called “ greenspan put. ” the rule followed by the fed was not to react to the formation of a bubble, but to mop - up its effects after the bubble burst. this was done by providing unlimited amount of liquidity and sharp reductions of interest rates. recent evidence confirms that including asset price deflation improved the fit of the taylor rule ( hall, 2011 ), and hence markets were expecting an easing of monetary conditions when asset prices declined significantly. this point was already raised almost ten years ago by miller et al. ( 2001 ), who argued that eliminating see, for example, acharya and naqvi ( 2010 ). bis central bankers ’ speeches downside risk of asset prices feeds the bubble, so more bubbles were not only the result of irrational exuberance but was also “ exaggerated by the faith in the stabilizing powers of mr. greenspan. ” regarding the second question, on the instruments for financial stability, this is what has been termed macroprudential tools, as opposed to the microprudential regulation, which targets the health of specific financial institutions. one of the first tools used for financial stability was the dynamic provisions to housing loans implemented in spain in 2000. it is still too early to have a full evaluation of this instrument, since it did not avoid a housing bubble, many small institutions dedicated to housing finance, the “ cajas ”, went bust during the crisis, but the overall spanish financial system fared well through it all. on the time dimension, the idea of macroprudential tools is to avoid the buildup of financial vulnerabilities in the upturn of the business cycle, and to have a cushion for the downturn. financial systems tend to be procyclical, and hence some break system should be implemented to avoid excessive risk - taking. this has been underlying the new rules in basel iii, especially in the definition of the countercyclical buffer of new capital requirements. on the cross - section dimension, extra capital has been proposed for systemic institutions in order to make them more resilient to financial turbulences. but