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Foreign Shocks and Monetary Policy Transmission in Chile


  • Eric Parrado H.


This paper considers empirical evidence for a small open economy, characterizing and identifying the dynamic effects of foreign and monetary policy shocks on Chilean macroeconomic variables. A structural VAR approach is used with non-recursive contemporaneous restrictions. The analysis provides several interesting results. First, consistent with the predictions of a stochastic rational-expectations model, a domestic monetary contraction generates a temporary reduction of output and monetary aggregates. Second, there is no evidence of price and exchange rate puzzles. Third, the source of Chilean output, price level, and real exchange rate volatility is similar to that identified in industrial countries; monetary policy explains a relatively small fraction of output, price level, and exchange-rate variability. Finally, foreign monetary policy innovations have short-lived effects on domestic interest rates and have no major influence over other Chilean macroeconomic variables. However, risk premium shocks influence significantly both the interest rate and the exchange rate.

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  • Eric Parrado H., 2001. "Foreign Shocks and Monetary Policy Transmission in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 4(3), pages 29-57, December.
  • Handle: RePEc:chb:bcchec:v:4:y:2001:i:3:p:29-57

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    Cited by:

    1. Helmut Franken & Guillermo Le Fort & Eric Parrado, 2006. "Business Cycle Responses and the Resilence of the Chilean Economy," Central Banking, Analysis, and Economic Policies Book Series,in: Ricardo Caballero & César Calderón & Luis Felipe Céspedes & Norman Loayza (Series Editor) & Klaus Sc (ed.), External Vulnerability and Preventive Policies, edition 1, volume 10, chapter 4, pages 071-108 Central Bank of Chile.
    2. Helmut Franken & Guillermo Le Fort & Eric Parrado, 2005. "Business Cycle Dynamics and Shock Resilience in Chile," Working Papers Central Bank of Chile 331, Central Bank of Chile.

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