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How Well Does a Monetary Dynamic Equilibrium Model Account for Chilean Data?

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  • Roberto Duncan

Abstract

The purpose of this paper is to figure out how well a money-in-the-utility-function model with a Taylor rule can match Chilean data, specially some monetary stylized facts. A dynamic stochastic general equilibrium model is formulated, solved and calibrated to evaluate its ability to replicate the main features of the Chilean economy in the 1986-2000 period. In particular, it focuses on a possible explanation to what the empirical literature calls the "price puzzle", the co-movement between interest rate and inflation. The solution of the model is adequately achieved through a perturbation method (second-order approximation). A positive transitory policy interest rate shock causes: (1) a temporary (non-significant) decline in output, (2) a decrease in real money balances, and (3) a temporary increase in the inflation rate. These findings are relatively consistent with those obtained from impulse-response functions estimated for Chile. Therefore, the theoretical model proposed is able to explain and reproduce the co-movement between interest rate and inflation. This relationship is caused by a Fisher effect and strengthened by the presence of a Taylor rule that depends positively on inflation deviation from its steady state equilibrium.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 190.

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Date of creation: Nov 2002
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Handle: RePEc:chb:bcchwp:190
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  1. CHUMACERO Rómulo, . "A Toolkit for Analyzing Alternative Policies in the Chilean Economy," EcoMod2003 330700037, EcoMod.
  2. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1998. "The Role of Investment-Specific Technological Change in the Business Cycle," RCER Working Papers 449, University of Rochester - Center for Economic Research (RCER).
  3. Raphael Bergoeing & Raimundo Soto, 2005. "Testing Real Business Cycle Models in a Emerging 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 7, pages 221-260 Central Bank of Chile.
  4. Pesaran, M. H. & Shin, Y., 1997. "Generalised Impulse Response Analysis in Linear Multivariate Models," Cambridge Working Papers in Economics 9710, Faculty of Economics, University of Cambridge.
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  7. Lawrence J. Christiano & Christopher J. Gust, 1999. "Taylor rules in a limited participation model," Working Paper Series WP-99-3, Federal Reserve Bank of Chicago.
  8. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Working Paper Series, Macroeconomic Issues WP-96-28, Federal Reserve Bank of Chicago.
  9. Rómulo A. Chumacero & J. Rodrigo Fuentes, 2002. "On the determinants of the Chilean Economic Growth," Working Papers Central Bank of Chile 134, Central Bank of Chile.
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  11. Raphael Bergoeing & Patrick J. Kehoe & Timothy J. Kehoe & Raimundo Soto, 2002. "Data Appendix to A Decade Lost and Found: Mexico and Chile in the 1980s," Technical Appendices bergoeing02, Review of Economic Dynamics.
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  16. Corbo, Vittorio, 1985. "International Prices, Wages and Inflation in an Open Economy: A Chilean Model," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 564-73, November.
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Cited by:

  1. Roberto Duncan, 2003. "Floating, Official Dollarization, and Macroeconomic Volatility:An Analysis for the Chilean Economy," Working Papers Central Bank of Chile 249, Central Bank of Chile.
  2. Rodrigo Caputo & Felipe Liendo & Juan Pablo Medina, 2007. "New Keynesian Models for Chile in the Inflation-Targeting Period," Central Banking, Analysis, and Economic Policies Book Series, in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 13, pages 507-546 Central Bank of Chile.
  3. Rodrigo Caputo & Felipe Liendo & Juan Pablo Medina, 2006. "New Keynesian Models For Chile During the Inflation Targeting Regime: A Structural Approach," Working Papers Central Bank of Chile 402, Central Bank of Chile.
  4. Rómulo A. Chumacero & Klaus Schmidt-Hebbel, 2005. "General Equilibrium Models: An Overview," 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 1, pages 001-027 Central Bank of Chile.
  5. 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.
  6. Acuña, Andrés, 2006. "Desempleo y Actividad Económica Regional: Un Enfoque Cíclico
    [Unemployment and Regional Economic Activity: A Cyclical Approach]    ," MPRA Paper 8275, University Library of Munich, Germany, revised Mar 2006.

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