on the part of the central bank, both to state - owned organizations and to the private sector. inflation followed inevitably and caused the failure of stabilization attempts in the years 1950 and 1960. the deterioration of the fiscal and monetary situation culminated in the early 1970s in a short hyperinflation. fiscal stabilization adopted in 1976, later associated to a new fixed exchange rate experiment with financial liberalization, without proper regulation and supervision, resulted in only temporary inflation control, a generalized collapse of the banking system and a profound economic recession. by 1985, the main macroeconomic concerns were to regain fiscal order, normalize external payments, restore the financial system and prevent the acceleration of inflation. in 1989, a new central bank ’ s constitutional organic law was enacted that mandated it to secure monetary stability and domestic and external payments, and granted it considerable autonomy to comply with this mandate. when the renewed central bank began operating in 1990, inflation was close to 30 % per annum. the new autonomous board designed a strategy to gradually bring down the inflation rate and adopted, beginning in january 1991, a partial regime of explicit inflation targets announced each year. all that took place in a context of a foreign exchange band that still lacked the institutionality and transparency that any full - fledged inflation targeting regime must have. despite these limitations, the central bank 1 / 5 was very successful in achieving inflation rates very near its annual goals, along a gradual but monotonic convergence path to single - digit inflation. average annual inflation dropped from 12. 1 % in the five years from 1991 to 1995 to 4. 8 % in 1996 - 2000. with the adoption of a floating exchange rate in 1999, the inflation target emerged as the only nominal anchor of monetary policy. simultaneously, in 1999 - 2000, the central bank formalized the conduct of its monetary policy into monthly meetings, it increased its capacity for analysis and projections and enhanced the transparency of its policies through the publication of a four - monthly monetary policy report ( with forecasts for inflation and growth ) and the dissemination of communications and minutes of its monthly monetary policy meetings. it also adopted a target range for annual inflation, of 2 % to 4 %, centered in 3 %, that would be in force indefinitely since 2001. the formalization of this inflation targeting scheme has continued in recent years, along with advances in the transparency of monetary policy. during the period 2001 - 2004, average annual inflation was 2. 2 %, and for the twelve months to september 2005 it rose to 3. 9 %

, largely influenced by the recent oil price shock. in fact, core inflation rates are still below 3 % per year. today chile has an it regime in place that is proven and credible, and that includes a floating exchange rate within an increasingly deep market to provide coverage against foreign exchange risks. also, its fiscal accounts are in order, the financial system is robust and fully integrated into the world ’ s capital markets. as a result, our country is more prepared than ever before to deal with external or internal shocks, and has the capacity to use a countercyclical monetary policy, which it has reinforced since the beginning of this decade. hot topics for monetary policy under inflation targeting – in chile and elsewhere a central bank ’ s tasks never end. the experience accumulated over the past several years, both in chile and in other countries, has brought new challenges and posed new questions on the conduct of monetary policy under inflation targeting. among these burning questions, let me single out a few : how uncertainty affects all the dimensions that influence monetary policy decisionmaking in chile — as in any other country — monetary policy is subject to several sources of severe uncertainty. to the classical doubts about the timeliness and quality of statistical data necessary to gauge the state of the economy, one must add imperfect knowledge about the nature and persistence of the intense shocks that hit our economy, uncertainty on how appropriate are the models we use to understand economic signals and make projections and, ultimately uncertainty on the value of the models ’ parameters. knowledge is also imperfect on the preferences of the society and of those responsible for the policies applied. does this generalized uncertainty that permeates central banks around the world justify slower policy reactions to shocks to inflation or gdp? how must dissimilar projections, coming from different models, be weighted in policy decisions? these and other questions raise the need to invest heavily in data, models and economic projections and research, a task to which the central bank of chile devotes great efforts. alternative assumptions for projections and public communication of the monetary policy interest rate and exchange rate in the projections on the future course of the economy and the inflation rate, in the central bank we have shifted from using a fixed future mpr to a projection of future rates consistent with a monetary policy reaction equation that is part of the model used to project inflation and growth. for the real exchange rate, considering that it is not too distant from the estimated equilibrium real exchange rate, we now use the assumption that the long - term real exchange rate