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Effects of Foreign and Domestic Monetary Policy in a Small Open Economy: the Case of Chile

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  • Eric Parrado

Abstract

This paper considers empirical evidence for a small open economy, characterizing and identifying the dynamic effects of both foreign and monetary policy shocks on Chilean macroeconomic variables. A structural VAR approach is used with non-recursive contemporaneous restrictions. Several interesting results appear in the analysis. First, consistent with the predictions of a stochastic rational expectations model, a domestic monetary contraction generates a transitory fall in 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 proportion of output, price level, and exchange rate variability. Finally, foreign monetary policy innovations have very short-lived effects on domestic interest rates and have no major influence over other Chilean macroeconomic variables; while risk premium shocks influence significatively both the interest rate and the exchange rate.

Suggested Citation

  • Eric Parrado, 2001. "Effects of Foreign and Domestic Monetary Policy in a Small Open Economy: the Case of Chile," Working Papers Central Bank of Chile 108, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:108
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    References listed on IDEAS

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    Cited by:

    1. Rómulo A. Chumacero, 2005. "A Toolkit for Analyzing Alternative Policies in the Chilean Economy," Central Banking, Analysis, and Economic Policies Book Series,in: Rómulo A. Chumacero & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), General Equilibrium Models for the Chilean Economy, edition 1, volume 9, chapter 8, pages 261-302 Central Bank of Chile.
    2. Verónica Mies M. & Felipe Morandé L. & Matías Tapia G., 2002. "Monetary Policy and Transmission Mechanisms: New Elements for an old Debate," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 5(3), pages 29-66, December.
    3. 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.
    4. Mustafa Kilinc & Cengiz Tunc, 2014. "Identification of Monetary Policy Shocks in Turkey: A Structural VAR Approach," Working Papers 1423, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    5. Arend, Mario, 2005. "Efectos de una nueva medida de shock monetario bajo el esquema de metas de inflación en Chile
      [Effects of a New Measure of Monetary Shock Under Inflation Targeting in Chile]
      ," MPRA Paper 27156, University Library of Munich, Germany.
    6. Fabián Gredig U. & Klaus Schmidt-Hebbel D. & Rodrigo O. Valdés P., 2008. "The Monetary Policy Horizon in Chile and Other Inflation-Targeting Countries," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 11(1), pages 5-27, April.
    7. Saki Bigio & Jorge Salas, 2006. "Non-Linear Effects of Monetary Policy and Real Exchange Rate Shocks in Partially Dollarized Economies: An Empirical Study for Peru," Working Papers 2006-008, Banco Central de Reserva del Perú.
    8. Héctor Bravo L. & Carlos García T. & Verónica Mies M. & Matías Tapia G., 2003. "Heterogeneidad de la Transmisión Monetaria: Efectos Sectoriales y Regionales," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 6(3), pages 5-26, December.
    9. Héctor Bravo L. & Carlos García T., 2002. "Measuring Monetary Policy and Pass-Through in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 5(3), pages 5-28, December.
    10. Berument Hakan & Ceylan Nildag Basak, 2008. "US Monetary Policy Surprises and Foreign Interest Rates: Evidence from a Set of MENA Countries," Review of Middle East Economics and Finance, De Gruyter, vol. 4(2), pages 117-133, April.
    11. Roberto Duncan, 2005. "How Well Does a Monetary Dynamics Equilibrium Model Account for Chilean Data?," Central Banking, Analysis, and Economic Policies Book Series,in: Rómulo A. Chumacero & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), General Equilibrium Models for the Chilean Economy, edition 1, volume 9, chapter 6, pages 189-220 Central Bank of Chile.
    12. Tomáš Havránek & Roman Horváth & Jakub Matějů, 2012. "Monetary transmission and the financial sector in the Czech Republic," Economic Change and Restructuring, Springer, vol. 45(3), pages 135-155, August.

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