This prevented him from steering the ship towards the sirens himself, and the crew were prevented from hearing him when he would later succumb to temptation and order the ship to be steered towards the sirens’ island. The story cannot be directly transferred to economic management, but the concept of “tying oneself to the mast” is used in promoting mechanisms that prevent short-term objectives from taking precedence over long-term objectives. Precluding the possibility of breaking a promise makes the promise more credible. Ensuring accountability for promises made through reporting and review can be a mechanism that ties us to the mast. A central bank’s most important task is to ensure a stable value of money. The value of money relies on responsible economic policies. For a central bank to be able to keep its word and deliver a stable value of money, it must have the backing of the political authorities. Otherwise, the central bank will not be able to keep its word. In the long term, the instruments available to the central bank allow it to deliver only the promise of a stable value of money. Earlier, this promise was kept by regulating the amount of money issued. Today, the instrument is the interest rate. The central bank cannot steer real wages, the labour supply, employment or the level of unemployment in the long term. But it can contribute to curbing short-term cyclical fluctuations if price stability is firmly anchored. Throughout history central banks have attempted to bind themselves to the mast in different ways.
Indeed, in mitigating inflationary pressures, an exchange rate appreciation restrains the MPR adjustments that could result from only the closing of the output gap. One working assumption we use in our projections is that the real exchange rate will change little into the long term. Any movements away from its trend are possible in a floating regime. Its potential financial effects on aggregate output and inflation will be definitely considered by the Board as an input for its future decisions. As we have demonstrated in the past, our monetary policy is highly flexible. It has contributed enormously to the good standing the Chilean economy enjoys today, in an environment of stable prices and restored employment and output. Now I will review the main features of the macroeconomic conditions we believe are the most likely for the next two years and its implications for inflation and monetary policy. Macroeconomic scenario The first closing of second-quarter National Accounts showed GDP growth at 6.5% y-o-y. In terms of velocity, the second quarter ended with an annualized quarterly variation of around 20% (figure 3). Domestic demand also grew above forecasts, driven by increased private consumption and a strong rebound of investment. Such dynamism has responded to not only temporary factors but also to more persistent ones. Among the temporary factors, what stands out is the immediate repair of the damages caused by the catastrophe of 27-F and the reversal of the dramatic contraction of domestic demand during 2009, associated to the then high levels of uncertainty.