majority, provisions – which includes dynamic provisions –, and countercyclical capital buffers have a statistically significant impact on the aforementioned variables. finally, reserve requirements and caps on credit ( or its growth ) do not have the same empirical support as the other policies in attaining their intended goals. 3. monetary policy and macroprudencial policy again, there is enough consensus that macroprudential policy is distinct from monetary policy, in the sense that they have different targets, methods and tools. despite all the advances made, there is still valid debate ongoing about the connection between these two policies, focusing on whether monetary policy should be used for macroprudential purposes, and how the monetary authority should be involved in the implementation of macroprudential policy. with regard to the first question, at the central bank of chile we are rather skeptical about using the monetary policy rate as a financial stability tool, for several reasons. firstly, it is not clear that the interest rate is an effective tool for dealing with the overexpansion of the financial system during booms, nor for containing systemic events during busts. the interest rate is too broad an instrument to play this role, as it affects not only the financial system, but real businesses and households as well. economic history is full of episodes in which a preemptive rise in rates had a negative economic effect on the real economy, but was not effective in controlling financial speculation and asset price inflation ( the great depression being perhaps the most salient ). nor is it clear that raising interest rates will necessary work in containing the expansion of the financial system : after all, a larger interest rate differential also attracts foreign capital. this force can be of particular importance in emes, often subject to carry - trade strategies which can lead to strong currency appreciations in countries that raise rates and create additional problems. secondly, credibility and transparency are key assets in the design and implementation of an inflation targeting regime. it is hard enough to communicate the logic behind mp decisions that seek solely to stabilize inflation around our stated target, given the complex interrelations between shocks, transmission mechanisms, and model uncertainty that central banks have to deal with. however, after long years of sticking to our framework and showing consistency between our actions and our inflation objective, we have built a reputation which is essential for isolating longer - term inflation expectations from transitory shocks ( both external and internal ), which as we all know facilitates the job of central banks enormously.

population of firms and consumers to 1, the equilibrium will occur when the demand equals the supply ( y = d ). in equilibrium under rational expectations, product must be equal to expected product, or : y = d ( y, σ ) now, with a couple more assumptions we can find the equilibrium ( figure 2 ). the equilibrium is unique in a. for this, the demand is assumed to be concave, that is, any additional demand for goods is smaller as income increases. to ensure a unique equilibrium we assume that, for ey = 0, the demand for the good is positive. this can be understood as the individual having another source of income and expenses, and always wanting to devote part of the other income to consume this good. another simple way of seeing it is to think that the individual will want to borrow to acquire this good, even if her income is very low, presumably because she always expects to have the funds available in the future to repay. as we will see, however, it is possible that multiple equilibria exist, with low and high output, as a result of coordination failures. uncertainty and the value of waiting decision making under uncertainty has always been a complex thing to study. often to simplify, we turn to quadratic specifications in order to use certainty equivalence. surely this this exercise is based on an mit class exercise which, despite having saved my notes and after a number of inquiries with friends, i have been unable to find. the original model was somewhat more complex because it assumed strategic interactions among firms, and here the demand is only taken as given. more formal models were developed in cooper and john ( 1988 ). for a thorough review of this literature, see cooper ( 1999 ). note that because this is only an illustration, many aspects were left out of the analysis. in this case we are assuming that there is some friction in the price - setting mechanism that prevents firms from selling all they want at a given price. this friction may come from firms deciding how much to produce before they know the demand, which would lead us to incorporate the producers ’ decisions to this story. analytically, however, it would not change much. falls short of describing the much more complex reality ; for example, when the analysis considers decisions to invest or consume ( durables ) in the presence of irreversibilities. 3 when a decision is irreversible, there is no chance to back out ; for example, an investment