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New Frontiers for Monetary Policy in Chile

  • Pablo S. García
  • Luis Oscar Herrera
  • Rodrigo Valdés

This paper assesses the efficiency of the current Inflation Targeting (IT) scheme in place at the Central Bank of Chile. Using a small macroeconomic model of the Chilean economy, our main results are as follows: (i) an efficient monetary policy requires a bias towards output stabilization around its long run trend; (ii) the switch to forecast-targeting, implicit in the current IT scheme in Chile, results in an efficiency gain; (iii) targeting core inflation is not efficient; (iv) ceteris paribus, efficiency could be enhanced if monetary policy leans against the wind when facing shocks to the cost of international finance.

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File URL: http://www.bcentral.cl/estudios/documentos-trabajo/pdf/dtbc125.pdf
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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 125.

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Date of creation: Nov 2001
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Handle: RePEc:chb:bcchwp:125
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  1. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  2. Rómulo Chumacero Escudero, 2000. "Se busca una raíz unitaria: evidencia para Chile," Estudios de Economia, University of Chile, Department of Economics, vol. 27(1 Year 20), pages 55-68, June.
  3. Andrew T.. Levin & Volker Wieland & John Williams, 1999. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Chapters, in: Monetary Policy Rules, pages 263-318 National Bureau of Economic Research, Inc.
  4. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  5. David H. Romer, 2000. "Keynesian Macroeconomics without the LM Curve," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 149-169, Spring.
  6. Juan Pablo Medina & Rodrigo Valdés, 2000. "Optimal Monetary Policy Rules Under Inflation Range Targeting," Working Papers Central Bank of Chile 61, Central Bank of Chile.
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