6  If the crisis was caused only by a rise in uncertainty, a rapid recovery could be expected (Bloom, 2009), but the argument here is that imbalances exist that may hold back this recovery slowing it down. BIS Review 76/2009  7  De Gregorio, J. (2009), “Chile frente a la recesión mundial,” Estudios Públicos, Vol. 113, summer 2009, pp. 5-26. Dixit, A. and R. Pindyck (1994), Investment Under Uncertainty, Princeton University Press. Figure 1  Countries posting drops in real GDP in the fourth quarter of 2008 (*) (percentage of whole sample) 100  100  90  90  80  80  70  70  60  60  50  50  40  40  30  30  20  20  10  10  0  0  71  74  77  80  83  86  89  92  95  98  01  04  07  (*) Using the annualized quarterly GDP for a sample of 29 developed an emerging economies. Source: Central Bank of Chile. Figure 2 Equilibrium  D  A  Y, EY  8  BIS Review 76/2009  Figure 3 Multiple Equilibria  D  A B  C  Y, EY  Figure 4 Volatility of S&P 500 (*) (percent) Subprime crisis erupts  90  Bear Stearns goes bankrupt  Lehmann, AIG, etc.
This is obviously not the case in Chile today. In our country, the extraordinary fiscal and monetary stimulus should be very effective, because these efforts are sustainable and credible. This is visible also, to different degrees, in other economies in the region that are committed to foreign exchange flexibility, price stability, fiscal responsibility and financial soundness. Developed economies will need to correctly address the medium-term effects of monetary expansions and increased public debt. If the origin of the global loss of confidence is the financial crisis, then stabilizing the banking industry and restoring the payment system is not only a priority but a necessary condition for economic recovery. Hence the importance that developed countries have placed on stabilizing the financial system, which is timidly beginning to bear fruit. No simple or rapid prescription exists to rebuild the confidence that has been lost. Some think that conveying optimism is a good idea. However, if such optimism has no ground, only a lack of sense of reality will be communicated. On the other hand, sending a pessimistic message can erode confidence even further. If there is one thing we know, not only about economics but about every walk of life, it is that people cannot be fooled forever, so the only way to act is realistically. 6  BIS Review 76/2009  We are enduring a world recession, and nobody disagrees about the current hardships the world economy faces, so the discussion has shifted to when we will see the first signs of recovery.