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

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Author Info
Roberto Duncan

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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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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 190.

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Date of creation: Nov 2002
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Handle: RePEc:chb:bcchwp:190

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
  2. Calani, Mauricio, 2007. "Testing Globalization-Disinflation Hypothesis," MPRA Paper 4787, University Library of Munich, Germany, revised 10 Sep 2007. [Downloadable!]
  3. Roberto Duncan, 2003. "Floating, Official Dollarization, and Macroeconomic Volatility:An Analysis for the Chilean Economy," Working Papers Central Bank of Chile 249, Central Bank of Chile. [Downloadable!]
  4. Marcelo Ochoa & Patricio Valenzuela, 2004. "Impactos de un Shock Externo en un Modelo Estocástico de Equilibrio General para una Economía Abierta: El Caso de Chile," Macroeconomics 0407007, EconWPA. [Downloadable!]
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