However, the economy has been weaker, widening the activity gap beyond expectations and reducing inflationary pressures. Accordingly, the Board deemed it appropriate to enhance the 7  monetary stimulus between January and March. Going forward, we believe that it will be necessary to increase this monetary impulse a bit more, using as a working assumption that the MPR will follow a a trajectory similar to the one implied by financial asset prices during the ten days prior to this statistical closing of this Report. As always, we reaffirm our commitment to conduct monetary policy with flexibility, so that projected inflation stands at 3% in the policy horizon. I will now share some final thoughts. Final thoughts The evolution of the economy in recent years has brought great challenges for monetary policy making around the world. The actions of central banks were paramount to take the world out of the financial crisis of 2008-2009 and to prevent a relapse in the following years, especially in those countries with less room for fiscal maneuvering. During this long period the effectiveness of monetary policy to influence inflation and economic activity was called into question. Though less dramatic than in other places, in Chile this discussion is also revisited every now and then. Before responding to the question of how effective monetary policy is, we must clarify two points: what objective does it pursue, and how does it operate, and then we can explore whether the means contribute to the ends.
For example, if home bias in the G20 was to fall as projected, then the sum of gross inflows to individual emerging markets – including flows from both advanced and other emerging markets – is on average $ trillion per year over the period. It would be easy to quibble with the detail of these projections. For example, cross-country information frictions, and hence home bias, may never be fully eliminated. East or West, home may remain best. Nonetheless, the slow, secular fall in this bias does not appear implausible if recent portfolio patterns are a reliable guide to the future. (b)  The evolution of financial depth  Theory would predict a positive, two-way relationship between financial depth and economic development. Not only does greater development spur the deepening of capital markets to finance investment projects, but deeper capital markets themselves may act as a spur for growth as they improve the efficiency of the financial intermediation process (Levine (2005)). Cross-country evidence again supports that hypothesis. Chart 9 plots the cross-sectional relationship between the log of GDP per capita and financial depth (measured as the ratio of equity market capitalisation to GDP). The correlation is positive and reasonably strong: GDP per capita accounts for almost half of the cross-sectional variation in the market capitalisation-to-GDP ratio. On average, a 10% rise in GDP per capita is associated with an increase in financial depth of around 1.5 percentage points. In principle, the relationship in Chart 9 could be used to simulate forward financial depth in the G20 economies.