On such markets, central government therefore usually applies regulations, such as those concerning the electricity network, for example, or actively runs the system, such as for the rail network, for example. Another characteristic of the payment market is the existence of positive network externalities. This means that when new users join a system, the utility increases for all participants, even those already in the system. Another example of a product with positive network effects is the telephone: the utility of having a telephone increases as more people join the telephone network, allowing you to call them. This means that coordinating different players on the market may lead to economic gains for society. Since utility increases with the number of users this means that the market has a tendency to eventually end up being dominated by a monopoly that takes over (a situation of natural monopoly, just as with economies of scale). The combination of economies of scale and network effects thus creates tendencies towards heavy concentration. Monopolies that maximise their returns will give rise to efficiency losses in the economy in general. 16 All in all, this suggests that it may be justifiable for central government to undertake the task of regulating the market, to reduce the power of monopolies, and as coordinator, to ensure that network externalities are internalised, which is exactly how it works in Sweden today. We can thus observe that, as money provides the necessary lubrication for all economic activity, efficient and secure forms of money are important for economic growth.
Thus, the central bank’s inflation forecast at the policy horizon becomes the intermediate target.2 In the case of Chile, our inflation target is three percent, and the time horizon is two years. As long as this target is credible, monetary policy will not only achieve inflation stability, but will also reduce the volatility of the business cycle. Analytically, the FIT regime is based on the idea that the policymaker minimizes a loss function that penalizes both inflation deviations from the target and deviations of output from full employment. Therefore, what the FIT does is to optimize the tradeoff between output  1  A predecessor was Taylor (1998) who called this period the “long boom.”  2  In order to avoid indeterminacy or multiple equilibria, the forecast must be the central bank’s forecast and not that of the market (Bernanke and Woodford, 1997). 2  BIS central bankers’ speeches  volatility and inflation volatility. The time horizon is what makes this scheme “flexible.” The target is not achieved in the short run since it also takes the output costs of achieving the target into account. A rigid inflation target is one in which the central bank only cares about inflation, and hence the horizon would be the shortest possible, enough for monetary policy to affect output. The longer the time horizon, the higher the weight of output volatility in the loss function (De Gregorio, 2007).