our reputation and credibility would suffer if we took any actions without being soundly convinced that they would be both convenient and effective towards achieving our objectives and at the same time inflict the smallest possible social cost. the third principle is that the central bank does not use the exchange rate to target inflation. there are many examples of financial crises and economic disasters when the exchange rate has been used as an anti - inflationary tool, generating serious exchange setbacks that only brought on substantial, costly adjustments to the real sector and caused long - lasting harm to gdp potential. however – and i must say this not to fail on the second principle i mentioned earlier – the exchange rate does affect inflation and, yes, it is affected by monetary policy in the short term. this is a channel for transmitting monetary policy in open economies that mitigates the cost in terms of increased unemployment of meeting the inflation target. let me rephrase this. inflation is controlled via the interest rate : if the outlook is inflation rising, then the interest rate is raised. in a closed economy, interest rate hikes slow down demand, which means that they also slow down economic activity and employment, thereby controlling inflationary pressures. this allows medium - and long - term policy to be upheld but obviously inflicts short - term costs. that is what stability is all about. in an open economy, on the other hand, there is an additional channel and that is the temporary exchange rate appreciation that results from raising the interest rate and this diminishes the need to slow down economic activity. the effects of exchange rate fluctuations on activity are an important factor in our evaluation of the inflation outlook and in our monetary policy decisions. at the present time, interest rate differentials with developed economies are well below historic averages and the interest rate is still below normal levels. the fourth principle i want to discuss is that stronger countries generally have stronger currencies. in other words, the purchasing power of their wage packets is comparatively greater as these economies outpace the rest of the world. we could discuss many more factors, such as ways to mitigate appreciation, what circumstantial factors spur it, etc. at the end of the day, what we need is to transform the cyclical strength of our economy into greater productivity which will increase our potential for growth. but it is important to note that this principle does not work the other way around. in the past we have been obnubilated equating a strong currency with

of 2003 ) while in the past five years they averaged 38 %. moreover, this increase has been based mainly on the growth of non - copper shippings which went up from only 30 % of total exports in the 1970s to 70 % in the past five years. that is, more than 80 % of chile ’ s exporting boom since the 1970s is due to non - copper exports. of course, this growth has not been free of reversals or accelerations due to external conditions and domestic circumstances. among external factors we can point to the sharp global downturn caused by the debt crisis and the 2009 recession and, of course, the devastating earthquake and tsunami in february this year. among domestic factors, we had the necessary sharp cutback to address high levels of foreign borrowing in the second half of the 1980s. nevertheless, as i said, the long - term performance bears witness to chile ’ s vocation as an exporting economy. what has been the role of the exchange rate in this process? this question can be looked at from two different angles. first, it is worth noting that chile ’ s export development has continued through good times and bad times in foreign accounts and with whatever exchange regime was in force and, over the past four decades, almost all possible regimes have been tried. however, on average, the real exchange rate has been significantly higher than it was in the period of economic development based on substitution of imports. this is no accident ; practical evidence and economic theory both strongly indicate that more open economies tend to have weaker currencies in real terms. second, irrespective of the exchange rate regime, foreign currency supply and demand conditions fluctuate over time so, as in many other areas, relative currency prices must also fluctuate. sometimes changes in supply and demand reflect speculation and thus are not associated with long - term fundamentals. at other times, they may reflect confusion as to the future evolution of monetary policy. in these situations, the central bank can intervene to affect the value of the currency and bring it back in line with fundamentals. the central bank does not consider exchange rate flotation as a dogma and constantly evaluates any possible over - reactions that could be harmful to the economy and call for an intervention. in any case, we must mention some costs of interventions. apart from the cost in net worth, intervention requires withdrawing money used to purchase foreign exchange by placing debt. this debt has an impact on market interest rates, affecting firms