Reaching One-Digit Inflation: The Chilean Experience
The main purpose of this paper is to analyze the process by which Chile was able to reduce inflation during the 1990s. In this period inflation was gradually reduced from close to 30% per annum in 1990 to only 6% in 1997. The paper concludes that three factors were important in helping to accomplish this performance. First, the independent Central Bank and its tough actions early on -to convey the message that it was ready to stand behind its mandate (to reduce inflation)- helped to shape inflationary expectations and in the process it led to lower wage inflation and ultimately a lower path for core inflation. Second, a restrictive monetary policy, and the foreign exchange intervention policies associated with it, resulted in a trajectory of the nominal exchange rate much below what would have been observed under a PPP rule adjusted for differences in productivity. This result was reinforced by the low credibility of the band reflected in the effect of the location of the exchange rate within the band on the observed rate. Third, the higher rate of growth of labor productivity, given the wage equation, resulted in a lower rate of growth of unit labor cost than otherwise. From these three effects the first effect, the enhanced credibility of the new policy operating through the formation of inflation expectations, was found to be the most important factor behind the success in reducing inflation rate.
Volume (Year): I (1998)
Issue (Month): (November)
|Contact details of provider:|| Postal: |
Phone: (5411) 6314-3000
Fax: (5411) 4314-1654
Web page: http://www.cema.edu.ar/publicaciones/jae.html
More information through EDIRC
References listed on IDEAS
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.:
- Fischer, Stanley, 1988. "Real Balances, the Exchange Rate, and Indexation: Real Variables in Disinflation," The Quarterly Journal of Economics, MIT Press, vol. 103(1), pages 27-49, February.
- Paul Krugman, 2000.
National Bureau of Economic Research, Inc, number krug00-1, May.
- Sebastian Edwards, 1996. "A Tale of Two Crises: Chile and Mexico," NBER Working Papers 5794, National Bureau of Economic Research, Inc.
- James H. Stock & Mark W. Watson, 1991.
"A simple estimator of cointegrating vectors in higher order integrated systems,"
Working Paper Series, Macroeconomic Issues
91-3, Federal Reserve Bank of Chicago.
- Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
- Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
- Sebastian Edwards, 1993. "Exchange Rates, Inflation and Disinflation: Latin American Experiences," NBER Working Papers 4320, National Bureau of Economic Research, Inc.
- Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
- Bruno, Michael, 1978. "Exchange Rates, Import Costs, and Wage-Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 379-403, June.
- Hargreaves, Colin P. (ed.), 1994. "Non-Stationary Time Series Analysis and Cointegration," OUP Catalogue, Oxford University Press, number 9780198773924, March.
- Bruno, M., 1991. "High Inflation and the Nominal Anchors of an Open Economy," Princeton Studies in International Economics 183, International Economics Section, Departement of Economics Princeton University,.
- Stanley Fischer, 1984. "Real Balances, the Exchange Rate and Indexation: Real Variables in Disinflation," NBER Working Papers 1497, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:cem:jaecon:v:1:y:1998:n:1:p:123-163. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Valeria Dowding)
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.