The Monetary Transmission Mechanism in Chile: A Medium-Sized Macroeconometric Model
This paper proposes and estimates a macroeconomic model of the Chilean economy. The model is designed as a short- and medium-term inflation-forecasting tool, which precisely identifies the transmission mechanism followed by monetary policy in Chile. The model specifies short-run dynamics as well as long-run equilibrium conditions. Cointegration and error correction techniques are used to estimate the relevant parameters, while some relations are calibrated. The model includes the main components of aggregate demand and external accounts, a supply-side block that relies on a standard production function, a specification for asset prices, and a wage/markup/price and labor market block. The short- and long run interdependence among each of these factors is taken into account to yield a forward-looking macroeconomic dynamic equilibrium. The key steadystate relative prices, such as the long-run real interest rate, the real exchange rate, and the sovereign risk premium, are endogenously determined. The model is used to explore and quantify the effects of monetary policy on inflation and how monetary policy is transmitted to inflation. The results obtained here are compared to the results of other simpler but less informative models, such as VAR and a smaller scale macroeconomic model, based on Phillips curves. The paper analyzes the response of some key macroeconomic variables to a number of permanent shocks.
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