In all cases, and to ensure adequate liquidity, instruments designed last year will continue to be in force throughout this year and, if necessary, they will be extended in order to ensure the proper operation of the financial system, so that it may be able to play its role of channeling credit to the non-financial private sector. 6  BIS Review 41/2009  It is important to highlight that, for mechanisms of monetary policy transmission to work correctly, the money market must be aligned with the MPR. There is no gain in reducing the interest rate if such reduction is not transmitted to the rest of the market. Therefore, when the crisis worsened, the first task was to ease liquidity pressures. The unfolding of the crisis and its consequent effects on inflation forecasts brought the possibility for a monetary easing. Said monetary easing has had a significant extent when compared to our past experiences and to what has been done by other central banks. During the first quarter, the MPR was reduced by 600 base points – from 8.25% to 2.25%. It is important to note once again that our economy has not suffered any of the problems undergone by other economies in their financial systems. Therefore, monetary easing in Chile does not seek to re-establish the operation of credit, as it may happen elsewhere; rather, it has been totally consistent with the inflationary outlook.
In this way, although we will not be spared the effects of the global crisis, we can indeed mitigate their impact. Now, I will start out by presenting a short discussion on the relationship between monetary easing and the origin of the current global crisis. Then, I will discuss the evolution of inflation and output. Next, I will address monetary policy decisions and I will close this presentation with some final remarks. On the origins of the crisis: monetary policy or financial regulation? A lot has been written on the causes of the crisis and, certainly, this is not the time to analyze the myriad of factors which led to it.1 But I certainly do want to talk about the interrelationship  1  Interesting analyses on the origins of the crisis may be found in the articles compiled in section I of Felton and Reinhart (2008). For more recent discussions see Brunnermeier (2009), and Diamond and Rajan (2009). BIS Review 41/2009  1  between the performance of the financial system and the abundant liquidity after the interest rate cut in the United States following the plunge of the high-tech bubble in 2000. Many blame the US expansionary monetary policy as the main cause of the crisis. Such policy would have caused the housing bubble. However, monetary policy easing does not necessarily bring about bubbles in asset prices or even adjustments that may cause such striking effects as the ones we have witnessed in the United States.