Monetary Policy, Exchange Rate and Inflation Inertia in Chile: a Structural Approach
AbstractThis paper estimates a DSGE model for Chile during the IT period using Bayesian techniques. In this setup, we investigate the way in which monetary policy has been designed. We also assess the performance of simple optimal rules under alternative preferences that the central bank may have, and we investigate whether the Phillips curve can be represented by a hybrid specification which considers inflation persistence. We conclude that the conduct of monetary policy in Chile during the last fifteen years can be characterized by a feedback rule in which the interest rate reacts to contemporaneous inflation misalignment from the target and to output deviations from its natural level. This policy presents an important degree of persistence, that has, however, declined in the past five years. Furthermore, fluctuations in the nominal exchange rate are not offset by the monetary authority: the interest rate response to movements in this variable is not different from zero. A second set of results indicates that inflation persistence, which is usually absent from the standard neo-Keynesian models, is a feature of the Chilean economy. In particular, a model in which the Phillips equation contains a lagged inflation term is preferred to an alternative one which does not consider inflation persistence. This inflation persistence has change in recent years, becoming less important than in the early nineties. On the other hand, since 1999 prices are adjusted less frequently: the probability of resetting prices has fallen. Finally, optimal simple rules for alternative preferences of the central bank show that, besides reacting to inflation and output, there are no welfare gains from reacting to exchange rate movements.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 352.
Date of creation: Dec 2005
Date of revision:
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.:
- Reinhart, Carmen & Calvo, Guillermo, 2002.
"Fear of floating,"
14000, University Library of Munich, Germany.
- Richard Clarida, 2001.
"The Empirics of Monetary Policy Rules in Open Economies,"
NBER Working Papers
8603, National Bureau of Economic Research, Inc.
- Clarida, Richard H, 2001. "The Empirics of Monetary Policy Rules in Open Economies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 315-23, October.
- Marco Del Negro & Frank Schorfheide, 2009.
"Inflation Dynamics in a Small Open Economy Model under Inflation Targeting: Some Evidence from Chile,"
Central Banking, Analysis, and Economic Policies Book Series,
in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 13, pages 511-562
Central Bank of Chile.
- Marco Del Negro & Frank Schorfheide, 2008. "Inflation dynamics in a small open-economy model under inflation targeting: some evidence from Chile," Staff Reports 329, Federal Reserve Bank of New York.
- Marco del Negro & Frank Schorfheide, 2008. "Inflation Dynamics in a Small Open Economy Model Under Inflation Targeting: Some Evidence From Chile," Working Papers Central Bank of Chile 486, Central Bank of Chile.
- Ather Maqsood Ahmed & Wasim Shahid Malik, 2011. "The Economics of Inflation, Issues in the Design of Monetary Policy Rule, and Monetary Policy Reaction Function in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(Special E), pages 213-232, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudio Sepulveda).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.