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The effects of domestic demand shocks on inflation in a small open economy: Chile in the period 2000–2021

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  • López, Ramón
  • Sepúlveda, Kevin A.

Abstract

This study decomposes the factors that determined inflation in Chile during the period 2000–2021. It finds that the main determinants of domestic inflation were variables of external origin and the exchange rate. Domestic demand played a rather limited role as an inflationary factor. In normal periods, increases in domestic demand generally explained no more than 25% of observed inflation. The average monthly inflation observed during the period 2000–2021 was 0.3%, which means that domestic demand growth in normal periods explained monthly inflation of 0.08%. Surprisingly, the extraordinary periods of rapid demand growth resulting from highly expansionary fiscal policies, large withdrawals from pension retirement savings or both had a rather modest effect on inflation. This study corroborates what might be expected in a small, open economy like Chile’s: most domestic price changes are determined by foreign price changes.

Suggested Citation

  • López, Ramón & Sepúlveda, Kevin A., 2022. "The effects of domestic demand shocks on inflation in a small open economy: Chile in the period 2000–2021," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.
    • Handle: RePEc:ecr:col070:48808
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