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Price Inflation and Exchange Rate Pass-Through in Chile

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  • Carlos José García
  • Jorge Enrique Restrepo

Abstract

A price equation based on a model of imperfect competition was estimated using quarterly data for Chile from 1986:1 to 2001:1. The estimation includes the first difference of the dependent variable following the literature on the estimation of linear quadratic adjustment cost (LQAC) models, when the target and some of the driving variables follow I(2) processes. The equation is used to generate out-of-sample inflation forecast, of a narrower-than the-CPI price index. We can conclude from the estimation results: i) exchange-rate pass-through depends positively on economic activity (output gap) explaining why pass-through has been so low in recent years in Chile. In other words, a negative output gap has compensated the inflationary impact of exchange-rate depreciation; ii) productivity reduces unit labor costs and inflation; iii) wages and foreign prices are positively related to inflation; iv) Finally, expected inflation acceleration is significant, confirming that expectations matter determining inflation.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 128.

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Date of creation: Nov 2001
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Handle: RePEc:chb:bcchwp:128

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Citations

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Cited by:
  1. Domac, Ilker, 2004. "Explaining and forecasting inflation in Tukey," Policy Research Working Paper Series 3287, The World Bank.
  2. Igor Masten & Bostjan Jazbec & Fabrizio Coricelli, 2004. "L’influence du régime de change sur l’inflation dans les pays adhérents," Économie et Prévision, Programme National Persée, vol. 163(2), pages 51-61.
  3. Ricardo J Caballero & Kevin Cowan & Jonathan Kearns, 2004. "Fear of Sudden Stops: Lessons from Australia and Chile," RBA Research Discussion Papers rdp2004-03, Reserve Bank of Australia.
  4. Gabriel Contreras & Pablo García, 2002. "Estimating Gaps and Trends for the Chilean Economy," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Economic Growth: Sources, Trends, and Cycles, edition 1, volume 6, chapter 15, pages 523-554 Central Bank of Chile.
  5. M. Abimbola Oyinlola & M. Adetunji Babatunde, 2009. "A Bound Testing Analysis Of Exchange Rate Pass- Through To Aggregate Import Prices In Nigeria: 1980-2006," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 34(2), pages 97-109, December.
  6. Reginaldo P. Nogueira Jnr, 2006. "Inflation Targeting and the Role of Exchange Rate Pass-through," Studies in Economics 0602, Department of Economics, University of Kent.
  7. Reginaldo P. Nogueira Jnr, 2006. "Inflation Targeting, Exchange Rate Pass-Through and 'Fear of Floating'," Studies in Economics 0605, Department of Economics, University of Kent.
  8. Luis Fernando Escobar Patiño & Pablo Hernán Mendieta Ossio, 2006. "Inflación y depreciación en una economía dolarizada: el caso de Bolivia," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(1), pages 1-39, enero-mar.
  9. Verónica Mies M. & Felipe Morandé L. & Matías Tapia G., 2002. "Monetary Policy and Transmission Mechanisms: New Elements for an old Debate," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 5(3), pages 29-66, December.
  10. Pablo García S. & Rodrigo Valdés P, 2003. "Dinero e Inflación en el Marco de Metas de Inflación," Working Papers Central Bank of Chile 198, Central Bank of Chile.
  11. Verónica Mies & Felipe Morandé & Matías Tapia, 2002. "Política Monetaria y Mecanismos de Transmisión: Nuevos Elementos para una Vieja Discusión," Working Papers Central Bank of Chile 181, Central Bank of Chile.
  12. Pablo García S. & Rodrigo Valdés P., 2003. "Money and Inflation in an Inflation-Tageting Regime," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 6(1), pages 21-47, April.
  13. Felipe Morandé L. & Matías Tapia G., 2002. "Exchange Rate Policy in Chile: the Abandonment of the Band and the Floating Experience," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 5(3), pages 67-94, December.
  14. Luis F. Céspedes C. & Claudio Soto G., 2006. "Inflation Targeting And Monetary Policy Credibility In Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 9(3), pages 53-70, December.

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