An empirical macroeconomic model for policy design : the case of Chile

The authors construct, estimate, and simulate a macroeconomic model for Chile. This model allows aggregate supply and demand factors to interact in determining such key economic variables as inflation, the real wage, the real exchange rate, real output and employment, and the current account balance. The model ensures the consistency of different aggregates by imposing the relevant budget constraints on the fiscal sector, the central bank, and the balance of payments. To this consistent framework, the model adds behavioral equations with sound analytical foundations. The authors use model simulations to explore the effects of domestic policies and external shocks (like a balanced-budget fiscal expansion, a policy of increased growth in minimum wages, a fall in world copper prices, and an oil price shock). These simulations help illustrate the effects of economic policies and external factors that shape current policy discussions in Chile.