Lending standards have certainly tightened, but the Chilean economy is far from suffering the problems that other countries are facing. Accordingly, the inflation outlook changed significantly, while monetary policy reacted with a change that was large in magnitude and swift in implementation. October 2008 was the month where y-o-y inflation peaked. November brought some relief, largely determined by the drop in fuel prices in world markets. By then, no break in the inflationary trend was foreseen. Nonetheless, given the weakening outlook for activity and inflation, the Central Bank not only did not raise the MPR – which was the most likely path of monetary policy as discussed in September’s Monetary Policy Report presented to Congress – but also communicated that the most likely course of action would be an easing of policy by early 2009. In January 2009, with a clearer assessment of the reduced inflationary pressures, the MPR was lowered by 100 basis points. Later, with the evidence of alleviated inflationary pressures and drastic increases in downward risks to growth and inflation, the Central Bank decided to cut the MPR by 250 basis points at both its meetings of February and March. The monetary easing process continued and completed 775 basis points in seven monthly meetings, bringing the MPR to 0.50%, the minimum level deemed adequate for a normal functioning of money markets.
A fiscal capacity for the euro area There are many ways a euro area fiscal capacity could be implemented, ranging from simple macro insurance or an unemployment benefit scheme to a fully-fledged euro area budget that could include the provision of public goods. Each of these options entails its own technical and political challenges and opportunities. In the end, the choice as to which option or combination 2  BIS central bankers’ speeches  of options should be adopted will need to be a political one. This is in fact an opportunity to have a debate about Europe’s collective goals; such a debate is more necessary than ever and goes beyond the economic sphere alone. 3 From the perspective of the economist and of the central banker who has a keen interest in making EMU as a whole work better, the crucial question behind the discussion about a fiscal capacity for the euro area is how to maximise its positive effects on the functioning of EMU, while at the same time preserving incentives for sound fiscal policy-making and addressing structural weaknesses at the national level. To start with, we should all be able to agree that the objective of the fiscal capacity should be to make EMU more resilient by increasing the capacity for automatic stabilisation in the euro area. The aim should not be to actively fine-tune national economic cycles or to equalise revenues.