Finally, there will be an additional effect associated with the public and private reconstruction efforts. The ultimate impact on growth and inflation will  BIS Review 61/2010  3  depend, among other factors, on the magnitude, composition and timing of those efforts, on the sources of funding that are used and on the focus of the related expenditures. As for the size of the loss in productive capital stock, the Board’s working assumption for this Report’s baseline scenario is that the catastrophe destroyed 3 percent of the economy’s net capital stock. Such an estimate, which is detailed in a box inside the Report, is based on the damage survey published by the government on March 23 and on the historical ratio between the gross value and the net value of the capital stock. To clarify this calculation, it is important to explain how this capital stock is measured. First, the gross capital stock equals the value of assets used in the productive process, valued “as new”. In other words, the nominal gross value of the capital stock can be proxied by the replacement cost. Second, the net value of the capital stock is the gross value of the capital stock minus the assets’ depreciation. This distinction between gross and net value of capital is important, because the latter – the net value – is what matters when measuring the economy’s productive capacity and, therefore, trend GDP, the output gap and inflationary pressures.
At a time when our monetary policy was working hard to prevent the propagation of the inflationary shock to other prices, we suffered the onset of an international financial crash of a magnitude not seen since the Great Depression of the 1930s. The sharp fall in demand, caused largely by a crisis of confidence and an unprecedented rise in volatility and uncertainty, caused a severe downturn in the world economy and in Chile. The downturn was especially strong in the last quarter of 2008 and the first four months of 2009. The drop in output during that period was determinant in the recession we saw last year. Macroeconomic policies reacted strongly. However, they could do little to counteract the immediate effects of this phenomenon, not only because of the lags with which they operate, but especially because of the sudden nature of the collapse in demand. Still, and as we have previously claimed, a monetary policy based on a flexible inflation targeting regime – that allows for the accommodation of shocks over a reasonable period of time –, a floating exchange rate, a solid financial system and a fiscal policy that saved during the good times, were key to ensuring a rapid and sustainable economic recovery. Our macroeconomic policy scheme allowed us implementing an unprecedented stimulus, which has had important positive effects on output, within a context of well contained inflationary pressures. The national economy began recovering by the middle of the second quarter of 2009.