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Supply Shocks in the Transition Towards an Inflation Targeting Reform: an Empirical Evidence for Guatemala

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  • Juan Carlos Castañeda
  • Carlos Eduardo Castillo
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    Abstract

    Supply shock effects comming from high import prices, such as the current oil price shock, are analyzed based on a dynamic semi-structural model calibrated for the Guatemalan economy. It is argued that a worldwide oil price increase affects domestic prices through a direct and an indirect channel. The former derives from the direct import of petroleum related products, which become more expensive, while the latter channel derives from the import of commodities whose production costs involve expenditures on any petroleum derivative product. In addition, three different central bank monetary policy responses to the oil shock namely a passive position, an output targeting policy, and inflation targeting are simulated and their results are compared. It is concluded that an inflation targeting regime, which is expected to be fully functioning in Guatemala by 2006 would be a better monetary policy response to contrarrest the negative effects of an oil shock, rather than the output targeting policy that is currently being undertaken.

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    Bibliographic Info

    Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 354.

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    Date of creation: Dec 2005
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    Handle: RePEc:chb:bcchwp:354

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    1. Ball, L. & Mankiw, G.H., 1992. "Relative-Price Change as Aggregate Supply Shocks," Harvard Institute of Economic Research Working Papers 1609, Harvard - Institute of Economic Research.
    2. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters, in: Monetary Policy Rules, pages 57-126 National Bureau of Economic Research, Inc.
    3. David Romer, 2000. "Keynesian Macroeconomics without the LM Curve," NBER Working Papers 7461, National Bureau of Economic Research, Inc.
    4. Kilian, Lutz, 2005. "Exogenous Oil Supply Shocks: How Big Are They and How Much do they Matter for the US Economy?," CEPR Discussion Papers 5131, C.E.P.R. Discussion Papers.
    5. Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
    6. Turnovsky, Stephen J, 1987. "Supply Shocks and Optimal Monetary Policy," Oxford Economic Papers, Oxford University Press, vol. 39(1), pages 20-37, March.
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