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The art and science of monetary and fiscal policies in an emerging economy

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  • Medina, Juan Pablo
  • Toni, Emiliano
  • Valdés, Rodrigo

Abstract

Assessing alternative macroeconomic policy frameworks presents significant challenges, as outcomes are often obscured by specific shocks and deviations from intended policy rules. These challenges are particularly pronounced in comprehensive framework overhauls. Using Chile as a case study, we examine two distinct policy regimes, focusing on the 2000 transition from a managed exchange rate to a floating exchange rate, combined with flexible inflation targeting and a more countercyclical fiscal policy. To quantify the contributions of these policy changes to economic stability, we employ a structural model tailored to the Chilean economy. We distinguish between the effects of shocks (luck), systematic policy actions (science), and deviations from implicit policy rules (art) on business cycle volatility. Our findings indicate that monetary and fiscal reforms (science) significantly reduced volatility in both GDP and inflation. Moreover, deviations from implicit policy rules (art) also contributed to macroeconomic stabilization. These results offer valuable insights for emerging markets and commodity-exporting economies.

Suggested Citation

  • Medina, Juan Pablo & Toni, Emiliano & Valdés, Rodrigo, 2025. "The art and science of monetary and fiscal policies in an emerging economy," Economic Modelling, Elsevier, vol. 152(C).
    • Handle: RePEc:eee:ecmode:v:152:y:2025:i:c:s0264999325002433
    DOI: 10.1016/j.econmod.2025.107248
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    Keywords

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    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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