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The "great moderation" and the monetary transmission mechanism in Chile

In: Transmission mechanisms for monetary policy in emerging market economies

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  • Cristina Betancour

    (Central Bank of Chile)

  • José De Gregorio

    (Central Bank of Chile)

  • Juan Pablo Medina

    (Central Bank of Chile)

Abstract

This paper analyzes the significant reduction in the volatility of output growth and inflation seen in the Chilean economy in the present decade. This reduced volatility, sometimes called the “great moderation,” coincides with several important changes to the Chilean macroeconomic framework, including the establishment of a full-fledged inflation targeting regime for monetary policy and a rule based on a target for the structural fiscal surplus. The paper examines the impact of these changes on the monetary transmission mechanism and explores how the “great moderation” has been affected by economic shocks and by the endogenous response of policy as reflected in the monetary transmission mechanism. The paper also reports results of a monetary vector autoregression model that finds important changes in the way shocks are transmitted to the Chilean economy.
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Suggested Citation

  • Cristina Betancour & José De Gregorio & Juan Pablo Medina, 2008. "The "great moderation" and the monetary transmission mechanism in Chile," BIS Papers chapters,in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 159-178 Bank for International Settlements.
  • Handle: RePEc:bis:bisbpc:35-07
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    References listed on IDEAS

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    1. Cristina Betancour & José De Gregorio & Alejandro Jara, 2006. "Improving the banking system: the Chilean experience," BIS Papers chapters,in: Bank for International Settlements (ed.), The banking system in emerging economies: how much progress has been made?, volume 28, pages 163-80 Bank for International Settlements.
    2. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 561-586, June.
    3. Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
    4. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
    5. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
    6. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
    7. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    8. Jose De Gregorio, 2003. "Productivity Growth and Disinflation in Chile," Working Papers Central Bank of Chile 246, Central Bank of Chile.
    9. Juan Pablo Medina & Claudio Soto, 2007. "Copper Price, Fiscal Policu and Business Cycle in Chile," Working Papers Central Bank of Chile 458, Central Bank of Chile.
    10. Jorge Roldos, 2006. "Disintermediation and Monetary Transmission in Canada," IMF Working Papers 06/84, International Monetary Fund.
    11. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
    12. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    13. Frederic S. Mishkin, 1996. "The Channels of Monetary Transmission: Lessons for Monetary Policy," NBER Working Papers 5464, National Bureau of Economic Research, Inc.
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    15. José De Gregorio, 2001. "La Política Cambiaria," Economic Policy Papers Central Bank of Chile 02, Central Bank of Chile.
    16. Verónica Mies & Felipe Morandé & Matías Tapia, 2002. "Política Monetaria y Mecanismos de Transmisión: Nuevos Elementos para una Vieja Discusión," Working Papers Central Bank of Chile 181, Central Bank of Chile.
    17. Rodrigo Alfaro & Helmut Franken & Carlos García & Alejandro Jara, 2003. "Bank Lending Channel and the Monetary Transmission Mechanism: the Case of Chile," Working Papers Central Bank of Chile 223, Central Bank of Chile.
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    Cited by:

    1. James L. Butkiewicz & Zeliha Ozdogan, 2013. "Financial crisis, monetary policy reform and the monetary transmission mechanism in Turkey," Working Papers 13-08, University of Delaware, Department of Economics.
    2. Serge Jeanneau & Camilo E Tovar, 2008. "Domestic securities markets and monetary policy in Latin America: overview and implications," BIS Papers chapters,in: Bank for International Settlements (ed.), New financing trends in Latin America: a bumpy road towards stability, volume 36, pages 140-163 Bank for International Settlements.
    3. Bank for International Settlements & Federal Reserve Bank of Atlanta, 2008. "New financing trends in Latin America: a bumpy road towards stability," BIS Papers, Bank for International Settlements, number 36, November.
    4. Donal McGettigan & Kenji Moriyama & Jean F Noah Ndela Ntsama & Francois Painchaud & Haonan Qu & Chad Steinberg, 2013. "Monetary Policy in Emerging Markets; Taming the Cycle," IMF Working Papers 13/96, International Monetary Fund.
    5. Gamber, Edward N. & Smith, Julie K. & Weiss, Matthew A., 2011. "Forecast errors before and during the Great Moderation," Journal of Economics and Business, Elsevier, vol. 63(4), pages 278-289, July.

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