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Foreign Shocks and Monetary Policy Transmission in Chile

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  • Eric Parrado H.

Abstract

This paper considers empirical evidence for a small open economy, characterizing and identifying the dynamic effects of foreign and monetary policy shocks on Chilean macroeconomic variables. A structural VAR approach is used with non-recursive contemporaneous restrictions. The analysis provides several interesting results. First, consistent with the predictions of a stochastic rational-expectations model, a domestic monetary contraction generates a temporary reduction of output and monetary aggregates. Second, there is no evidence of price and exchange rate puzzles. Third, the source of Chilean output, price level, and real exchange rate volatility is similar to that identified in industrial countries; monetary policy explains a relatively small fraction of output, price level, and exchange-rate variability. Finally, foreign monetary policy innovations have short-lived effects on domestic interest rates and have no major influence over other Chilean macroeconomic variables. However, risk premium shocks influence significantly both the interest rate and the exchange rate.

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Bibliographic Info

Article provided by Central Bank of Chile in its journal Economía Chilena.

Volume (Year): 4 (2001)
Issue (Month): 3 (December)
Pages: 29-57

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Handle: RePEc:chb:bcchec:v:4:y:2001:i:3:p:29-57

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  1. Rómulo Chumacero, 2003. "A Toolkit for Analyzing Alternative Policies in The Chilean Economy," Working Papers Central Bank of Chile, Central Bank of Chile 241, Central Bank of Chile.
  2. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc.
  3. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers, Stockholm University, Institute for International Economic Studies 638, Stockholm University, Institute for International Economic Studies.
  4. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, Elsevier, vol. 36(5), pages 975-1000, June.
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  7. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
  8. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 45(3), pages 561-586, June.
  9. David O. Cushman & Tao Zha, 1995. "Identifying monetary policy in a small open economy under flexible exchange rates," Working Paper, Federal Reserve Bank of Atlanta 95-7, Federal Reserve Bank of Atlanta.
  10. Olivier J. Blanchard & Mark W. Watson, 1987. "Are Business Cycles All Alike?," NBER Working Papers 1392, National Bureau of Economic Research, Inc.
  11. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(2), pages 379-408, May.
  12. Grilli, Vittorio & Roubini, Nouriel, 1996. "Liquidity models in open economies: Theory and empirical evidence," European Economic Review, Elsevier, Elsevier, vol. 40(3-5), pages 847-859, April.
  13. Eichenbaum, Martin & Evans, Charles L, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(4), pages 975-1009, November.
  14. Bennett T. McCallum, 1993. "Unit roots in macroeconomic time series: some critical issues," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Spr, pages 13-44.
  15. Eric Parrado & Andres Velasco, 2002. "Optimal Interest Rate Policy in a Small Open Economy," NBER Working Papers 8721, National Bureau of Economic Research, Inc.
  16. Patricio Rojas, 1993. "El Dinero como un Objetivo Intermedio de Política Monetaria en Chile: Un Análisis Empírico," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 30(90), pages 139-178.
  17. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
  18. Kim, Soyoung, 1999. "Do monetary policy shocks matter in the G-7 countries? Using common identifying assumptions about monetary policy across countries," Journal of International Economics, Elsevier, Elsevier, vol. 48(2), pages 387-412, August.
  19. Calvo, Guillermo A. & Mendoza, Enrique, 1998. "Empirical Puzzles of Chilean Stabilization Policy," Working Papers, Duke University, Department of Economics 98-02, Duke University, Department of Economics.
  20. Vittorio Grilli & Nouriel Roubini, 1995. "Liquidity and Exchange Rates: Puzzling Evidence from the G-7 Countries," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 95-17, New York University, Leonard N. Stern School of Business, Department of Economics.
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Cited by:
  1. Helmut Franken & Guillermo Le Fort & Eric Parrado, 2005. "Business Cycle Dynamics and Shock Resilience in Chile," Working Papers Central Bank of Chile, Central Bank of Chile 331, Central Bank of Chile.
  2. Helmut Franken & Guillermo Le Fort & Eric Parrado, 2006. "Business Cycle Responses and the Resilence of the Chilean Economy," Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, in: Ricardo Caballero & César Calderón & Luis Felipe Céspedes & Norman Loayza (Series Editor) & Klaus (ed.), External Vulnerability and Preventive Policies, edition 1, volume 10, chapter 4, pages 071-108 Central Bank of Chile.

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