Effects of Foreign and Domestic Monetary Policy in a Small Open Economy: the Case of Chile
AbstractThis paper considers empirical evidence for a small open economy, characterizing and identifying the dynamic effects of both foreign and monetary policy shocks on Chilean macroeconomic variables. A structural VAR approach is used with non-recursive contemporaneous restrictions. Several interesting results appear in the analysis. First, consistent with the predictions of a stochastic rational expectations model, a domestic monetary contraction generates a transitory fall in 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 proportion of output, price level, and exchange rate variability. Finally, foreign monetary policy innovations have very short-lived effects on domestic interest rates and have no major influence over other Chilean macroeconomic variables; while risk premium shocks influence significatively both the interest rate and the exchange rate.
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Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 108.
Date of creation: Sep 2001
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-02-10 (All new papers)
- NEP-CBA-2002-02-15 (Central Banking)
- NEP-IFN-2002-02-15 (International Finance)
- NEP-MON-2002-02-15 (Monetary Economics)
- NEP-PKE-2002-02-15 (Post Keynesian Economics)
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- Tomáš Havránek & Roman Horváth & Jakub Matějů, 2012. "Monetary transmission and the financial sector in the Czech Republic," Economic Change and Restructuring, Springer, vol. 45(3), pages 135-155, August.
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