Monetary Policy in Chile: Institutions, Objectives,and Instruments

The behavior of inflation in Chile over the last 30 years has striking similarities to the experience of many industrialized and developing economies. The successful reduction of inflation, in a context of health GDP growth, reflects a combination of factors, ranging from better policies (both in terms of objectives and actual policy management) to a global supply shock that reduced inflation everywhere. Thus, the reduction of inflation in Chile was not solely luck or solely inspiration from the monetary authorities, but rather a (successful) combination of both. The paper performs two empirical exercises to analyze the behavior of inflation in the last 3 decades. Using the structural break methodology developed by Bai and Perron, we find that inflation process has changed twice since 1977, both changes roughly coinciding with relevant changes in both the monetary policy framework and international conditions. The second exercises uses the UC-SV model developed by Stock and Watson (2007). Comparing our results for Chile with a similar exercise for the G7, we confirm the strong similarities between the timing and characteristics of the inflation process in Chile and the industrialized world. This paper can be seen as the first part of wider agenda that tries to understand the features of inflation in Chile, with an emphasis on placing them on an international context. Future research will try to empirically analyze those mechanisms, shedding some light on the competing hypotheses and their relative weight.(This abstract was borrowed from another version of this item.)