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How Well Does a Monetary Dynamics Equilibrium Model Account for Chilean Data?

In: General Equilibrium Models for the Chilean Economy

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  • Roberto Duncan

    (University of Wisconsin-Madison)

Abstract

The purpose of this paper is to figure out how well a money-in-the-utility-function model with a Taylor rule can match Chilean data, specially some monetary stylized facts. A dynamic stochastic general equilibrium model is formulated, solved and calibrated to evaluate its ability to replicate the main features of the Chilean economy in the 1986-2000 period. In particular, it focuses on a possible explanation to what the empirical literature calls the "price puzzle", the co-movement between interest rate and inflation. The solution of the model is adequately achieved through a perturbation method (second-order approximation). A positive transitory policy interest rate shock causes: (1) a temporary (non-significant) decline in output, (2) a decrease in real money balances, and (3) a temporary increase in the inflation rate. These findings are relatively consistent with those obtained from impulse-response functions estimated for Chile. Therefore, the theoretical model proposed is able to explain and reproduce the co-movement between interest rate and inflation. This relationship is caused by a Fisher effect and strengthened by the presence of a Taylor rule that depends positively on inflation deviation from its steady state equilibrium.

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This chapter was published in: Rómulo A. Chumacero & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.) General Equilibrium Models for the Chilean Economy, , chapter 6, pages 189-220, 2005.

This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v09c06pp189-220.

Handle: RePEc:chb:bcchsb:v09c06pp189-220

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  1. Raphael Bergoeing & Raimundo Soto, 2005. "Testing Real Business Cycle Models in a Emerging Economy," Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, in: Rómulo A. Chumacero & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel ( (ed.), General Equilibrium Models for the Chilean Economy, edition 1, volume 9, chapter 7, pages 221-260 Central Bank of Chile.
  2. Lawrence J. Christiano & Christopher J. Gust, 1999. "Taylor rules in a limited participation model," Working Paper 9902, Federal Reserve Bank of Cleveland.
  3. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Current Real-Business-Cycle Theories and Aggregate Labor-Market Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 430-50, June.
  4. Shamik Dhar & Stephen P Millard, 2000. "A limited participation model of the monetary transmission mechanism in the United Kingdom," Bank of England working papers 117, Bank of England.
  5. Corbo, Vittorio, 1985. "International Prices, Wages and Inflation in an Open Economy: A Chilean Model," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 564-73, November.
  6. McGrattan, Ellen R., 1994. "The macroeconomic effects of distortionary taxation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(3), pages 573-601, June.
  7. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1998. "The Role of Investment-Specific Technological Change in the Business Cycle," RCER Working Papers 449, University of Rochester - Center for Economic Research (RCER).
  8. Raphael Bergoeing & Patrick J. Kehoe & Timothy J. Kehoe & Raimundo Soto, 2001. "A Decade Lost and Found: Mexico and Chile in the 1980s," NBER Working Papers 8520, National Bureau of Economic Research, Inc.
  9. Rómulo A. Chumacero & J. Rodrigo Fuentes, 2002. "On the determinants of the Chilean Economic Growth," Working Papers Central Bank of Chile, Central Bank of Chile 134, Central Bank of Chile.
  10. Fernando Alvarez & Robert E. Lucas, Jr. & Warren E. Weber, 2001. "Interest rates and inflation," Working Papers, Federal Reserve Bank of Minneapolis 609, Federal Reserve Bank of Minneapolis.
  11. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1997. "Sticky price and limited participation models of money: A comparison," European Economic Review, Elsevier, Elsevier, vol. 41(6), pages 1201-1249, June.
  12. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Pesaran, M. H. & Shin, Y., 1997. "Generalised Impulse Response Analysis in Linear Multivariate Models," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 9710, Faculty of Economics, University of Cambridge.
  14. Rómulo A. Chumacero, 2005. "A Toolkit for Analyzing Alternative Policies in the Chilean Economy," Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, in: Rómulo A. Chumacero & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel ( (ed.), General Equilibrium Models for the Chilean Economy, edition 1, volume 9, chapter 8, pages 261-302 Central Bank of Chile.
  15. C.K. Folkertsma, 1998. "Nominal wage contracts, adjustment costs and real persistence of monetary shocks," WO Research Memoranda (discontinued), Netherlands Central Bank, Research Department 566, Netherlands Central Bank, Research Department.
  16. Eric Parrado, 2001. "Effects of Foreign and Domestic Monetary Policy in a Small Open Economy: the Case of Chile," Working Papers Central Bank of Chile, Central Bank of Chile 108, Central Bank of Chile.
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Cited by:
  1. Rodrigo Caputo & Felipe Liendo & Juan Pablo Medina, 2006. "New Keynesian Models For Chile During The Inflation Targeting Regime: A Structural Approach," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 9(3), pages 73-95, December.
  2. Rodrigo Caputo & Felipe Liendo & Juan Pablo Medina, 2007. "New Keynesian Models for Chile in the Inflation-Targeting Period," Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 13, pages 507-546 Central Bank of Chile.
  3. Acuña, Andrés, 2006. "Desempleo y Actividad Económica Regional: Un Enfoque Cíclico
    [Unemployment and Regional Economic Activity: A Cyclical Approach]
    ," MPRA Paper 8275, University Library of Munich, Germany, revised Mar 2006.
  4. Rómulo A. Chumacero & Klaus Schmidt-Hebbel, 2004. "General Equilibrium Models: An Overview," Working Papers Central Bank of Chile, Central Bank of Chile 307, Central Bank of Chile.
  5. Roberto Duncan, 2003. "Floating, Official Dollarization, and Macroeconomic Volatility:An Analysis for the Chilean Economy," Working Papers Central Bank of Chile, Central Bank of Chile 249, Central Bank of Chile.
  6. Héctor Bravo L. & Carlos García T., 2002. "Measuring Monetary Policy and Pass-Through in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 5(3), pages 5-28, December.

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