elements reduce the potential impact of an increase in interest rates on the financial burden of households. regarding the government sector, the mitigation of interest rate risk depends also on the behavior of the economy ’ s investor base. this makes the way in which the demand for and supply of bonds behave in stressful times particularly relevant. the importance of the participation of pension funds and mutual funds in sovereign bond holdings and the fact that in the face of external shocks, the less risky funds — and with a greater share of sovereign bonds — become more attractive, also offers a cushion to the effects international interest rate shocks. even so, this is an especially important moment to strengthen potentially vulnerable flanks in emerging economies. as i have said before, it is important to restore the slack that has helped sustain chile's macroeconomic policy framework. especially important in this regard is to moderate and possibly reverse the course of public indebtedness, adopt a framework to capitalize the banking system and ensure a sustainable evolution of household borrowing. the signals of the government regarding the orientation of its fiscal policy, its backing of the new general banking act and the reactivation of its search for mechanisms to consolidate borrowers ’ financial information are very positive in this regard. equally valuable in dealing with future turbulences seems to be to strengthen fiscal institutions by enhancing the status and autonomy of the fiscal advisory council, as well as acknowledging the role of institutional investors in the chilean economy in the face of future reforms. dear senators, the chilean economy is progressing in the recovery of growth and the closing of gaps. rather than a result, this is a good start for a more favorable stage of the business cycle. many challenges lie ahead. it is important to deepen the recovery of investment, that the labor market be strengthened and that competitive advantages be exploited to make this recovery more self - sustained and shared. greater long - term growth calls for more structural changes that will help raise productivity. the central bank will be there to ensure that imbalances or vulnerabilities do not incubate in the process, which later may require more costly adjustments. together we also have the responsibility to strengthen those factors that allow us to better withstand external shocks that will sooner or later be felt. the analysis and projections in this report contribute to the understanding of how the central bank exercises its responsibilities, as well as the opportunities and challenges that we face together. we remain at your disposal to deepen this discussion. thank you. * * * figure 1 quarterly gdp

jose de gregorio : chile ’ s latest monetary policy report presentation by mr jose de gregorio, governor of the central bank of chile, of the monetary policy report before the finance commission of the honorable senate of the republic, santiago de chile, 6 april 2010. * * * introduction ms president of the finance commission senator evelyn matthei, senators. i am grateful for this commission ’ s invitation to the board of the central bank of chile to present our vision of the recent macroeconomic developments, prospects and implications for monetary policy contained in detail in our monetary policy report of march 2010. in the past few years, the chilean economy and macroeconomic policies have been subjected to unprecedented tension. first we suffered the consequences of a major inflationary shock caused by great increases in the price of foodstuffs and energy, with large and costly repercussions on the economy. in a country that had left the scourge of inflation behind, the population had to endure the rigors of price increases once again. the structural characteristics of our economy – small, open, and market oriented – with few distortions in its pricing mechanisms, contributed decisively to the international price shock being heavily transmitted to domestic prices. these same characteristics also contributed to the significant reductions in inflation that were observed beginning in late 2008. at a time when our monetary policy was working hard to prevent the propagation of the inflationary shock to other prices, we suffered the onset of an international financial crash of a magnitude not seen since the great depression of the 1930s. the sharp fall in demand, caused largely by a crisis of confidence and an unprecedented rise in volatility and uncertainty, caused a severe downturn in the world economy and in chile. the downturn was especially strong in the last quarter of 2008 and the first four months of 2009. the drop in output during that period was determinant in the recession we saw last year. macroeconomic policies reacted strongly. however, they could do little to counteract the immediate effects of this phenomenon, not only because of the lags with which they operate, but especially because of the sudden nature of the collapse in demand. still, and as we have previously claimed, a monetary policy based on a flexible inflation targeting regime – that allows for the accommodation of shocks over a reasonable period of time –, a floating exchange rate, a solid financial system and a fiscal policy that saved during the good times, were key to ensuring a rapid and sustainable economic recovery. our macroeconomic policy scheme allowed