were not only complex but also very difficult to price. in de gregorio ( 2001 ), i discuss these points in connection with the first intervention period of 2001, and in de gregorio ( 2006 ) i do so in the context of inflation targets and financial stability. in the present juncture we still face a severe inflationary challenge. in our last monetary policy report we stated that, in our baseline scenario, we needed to grow somewhat less than our potential to contain the inflationary pressures and ensure inflation convergence to its target rate of 3 % annually over a two - year horizon. we also thought that the world economy would not help to reduce inflation. today the scene has changed and we are carefully reviewing its inflationary implications. to begin with, the international scenario may trigger a reduction in demand that could help contain inflation. this certainly has implications on the monetary policy trajectory, consistent with the inflation target. secondly, commodity prices are in a tailspin, particularly in the case of oil. however, these events have not fully passed through to our economy, because our currency has depreciated substantially. overall, more evidence is needed with respect to the persistence of the recent events in the world to calibrate the monetary impulse. the central bank of chile has paid close attention to external developments and has been ready to provide any liquidity required for the proper operation of the financial markets, as it has been doing since the end of september and will continue to do for as long as it deems necessary. i am convinced that we will weather this international financial crisis successfully. we have built a macroeconomic policy scheme with sufficient degrees of flexibility and a strong commitment to stability that, under the current circumstances have the challenge of attenuating the adverse world economic scenario and ensure stability. our monetary policy is oriented at controlling inflation. the exchange rate floats to absorb international shocks without causing major disruptions in domestic activity. the fiscal policy is based on a rule that implies saving transitory incomes and today enjoys the benefits of prudence. fiscal savings, combined with the central bank ’ s international liquidity position, provide a reserve of resources that permits us to accommodate external financing shocks even worse than those we are seeing now. our financial system has been prudent and has the necessary levels of capitalization to play its credit intermediating role properly. prudence, both of the private sector and of the macroeconomic policies, can now yield their fruits in the worst financial episode the world has had to suffer in

a strong economy, but we soon had to realize that the strength of the currency was not due to a fundamentally sound economy but rather the outcome of policies inducing currency misalignment. i would like to draw your attention to the fact that i have not included a flexible exchange rate as one of the principles, in order to avoid dogmatism. but in our country, experience overwhelmingly shows that exchange rate flexibility, managed pragmatically, is the most adequate system for us. this regime some times involves drastic exchange rate adjustments, which can be costly to many firms. the alternative is a more rigid exchange rate, where fluctuations in foreign currency supply are mirrored by fluctuations in domestic credit cost and availability, which can be very detrimental to the financial system ’ s soundness and to firms. more rigid systems simply put off real - sector adjustments, but in the meantime capital flows, credit availability for firms and inflation are all affected and eventually the value of the currency is eroded and the higher nominal exchange rate does not lead to a higher real exchange rate. on the other hand, a floating exchange rate allows more rapid adjustments and the next movements of the exchange rate are uncertain, preventing the market from betting on one direction. thus we avoid repeating past mistakes and returning to the days where prospects of gradual appreciation artificially cheapened foreign borrowing and induced massive capital inflows. another important factor in determining the exchange rate are pressures from fiscal policy. for more than twenty years, chile has benefited from a responsible fiscal policy, using it counter - cyclically when the situation warranted. questions of budget go beyond macroeconomic considerations but the fact is that in the present circumstances our economy has started to take off and does not require an additional boost from fiscal policy. the finance minister ’ s recent statement on the budget aims towards reducing the structural fiscal deficit and is fully coherent with assumptions in our latest monetary policy report. now, from the standpoint of export development, several aspects are worth highlighting. firstly, since the mid - 1970s, chile adopted an ambitious agenda of insertion into the world economy. this drive has accelerated and deepened over the years. some sectors of the economy that were protected by international trade barriers had to adjust. eliminating protection meant that each productive activity had to focus on its own comparative advantages and the export sector benefited from this structural change, as confirmed by the sustained growth of exports as a percentage of gdp. in the 1970s, goods and services exports accounted for about 10 % of gdp ( measured in pesos