greater trade and financial integration, which is a source of greater interdependence cross economies, but is also a source of much greater opportunities for developing countries. finally, financial markets are much more sophisticated, which is also a source of vulnerabilities and opportunities. there has been also a profound evolution of macroeconomics. developments, such as rational expectations and dynamic inconsistency, changed the views on what macroeconomic policies could achieve. they were also the basis for the discussion of rules versus discretion, and the general preference for the conduct of policies under flexible rules, or constrained discretion. the possibility of expectational inefficiencies has also become an important insight for policies. contagion, self - fulfilling prophecies, coordination failures and multiple equilibria, are just some of the phenomena from which market inefficiencies arise, and there are many examples in the real world. however, one has to be careful when the failure of bad policies is attributed to phenomena outside the control of authorities. many crises that some may want to classify as bad - expectational equilibria are simply the result of bad policies. indeed, there is no crisis that has struck a country without an associated fundamental problem. what expectational inefficiencies do is that they amplify the probability of occurrence and the cost of crises. other important development has been the understanding of policymaking, in particular monetary policy, as a rule rather than changes in policy variables without reason. thus, rather than thinking of changes in the policy variables, it is more realistic to think of changes in the determinants of policies. finally, we have learned that credibility is central for the effectiveness of policies. all these developments have also led to changes in the way monetary policy is conducted. however, an important caveat has to be made. there is a two - way relationship between theory and policy developments. it would be presumptuous to argue that theory has changed policies. indeed, the development of inflation targeting came before it was seriously discussed in academic circles. new zealand implemented its inflation targeting regime in the early 1990s, before the main analytical developments took place. along the same line, the taylor rule was, obviously, used before john taylor estimated it. regardless causality, monetary policy and central banking have changed significantly. the movement toward granting central bank independence around the world has been a positive one. of course, this comes with the challenge for central bankers to demonstrate

##reaction in the foreign exchange market that is pushing the real exchange rate significantly away from its fundamentals. it is important that the intervention is consistent with the inflationary objectives, because otherwise it might hurt the credibility of monetary policy. although interventions can be either sterilized or not, the inflation targeting regime together with the exceptional nature of the intervention means that, generally, a foreign exchange intervention must be sterilized. therefore, monetary policy decisions can be made independently of the exceptional intervention. in addition, the purpose of the intervention should be to stabilize the foreign exchange market without pursuing a specific level for the exchange rate. in a context of capital mobility, sterilized interventions can influence the exchange rate via the portfolio channel and interest rate differentials. this occurs because it affects the relative supply of assets in domestic currency in the local market, signals future interest rate movements, or provides information about policy makers ’ perception on the fundamental value of the exchange rate. in chile, after the elimination – in december 1999 – of the exchange rate band and the adoption of the inflation - targeting regime, the central bank stated that exceptional circumstances may require an intervention in the foreign exchange market. since then, the central bank has intervened on three occasions. the first time, in august 2001, the central bank announced that it might intervene at any moment from then to the end of the year. it also explained that the exchange rate was depreciating very fast and with great volatility, which was cause for concern in financial markets, despite the fact that the peso was weakening largely because of stressful conditions abroad. the intervention consisted in a sale of up to us $ 2 billion of international reserves and issuing another us $ 2 billion in dollarindexed bonds. the final intervention amounted to a sale of slightly above us $ 800 million and the full issuance of bonds. the second time, in october 2002, the bank announced a similar package, as it considered that the depreciation reflected an overreaction, high volatility and a liquidity shortage. us $ 1. 50 billion were issued in exchange rate indexed debt and no reserves were sold. the third time, in april 2008, because of the high global uncertainty, the bank decided to increase its holdings of reserves, while recognizing that, at the time of the announcement, the exchange rate was appreciated relative to its long - term fundamentals. the intervention consisted in daily purchases of us $ 50 million intended to accumulate us $ 8 billion in