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The Monetary Transmission Mechanism in Chile: A Medium-Sized Macroeconometric Model

  • Carlos García
  • Pablo García
  • Igal Magendzo
  • Jorge Restrepo

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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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 254.

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Date of creation: Dec 2003
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Handle: RePEc:chb:bcchwp:254
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  1. Lars E O Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Bank of England working papers 56, Bank of England.
  2. Frederic S. Miskin & Klaus Schmidt-Hebbel, 2007. "Monetary Policy under Inflation Targeting: An Introduction," 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 1, pages 001-022 Central Bank of Chile.
  3. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  4. Francisco Rosende & Luis Oscar Herrera, 1991. "Teoría y Política Monetaria: Elementos para el Análisis," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 28(83), pages 55-94.
  5. Patricio Rojas, 1993. "El Dinero como un Objetivo Intermedio de Política Monetaria en Chile: Un Análisis Empírico," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 30(90), pages 139-178.
  6. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
  7. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1994. "The Financial Accelerator and the Flight to Quality," NBER Working Papers 4789, National Bureau of Economic Research, Inc.
  8. Francisco Gallego & Raimundo Soto, 2000. "Evolución del Consumo y Compras de Bienes Durables en Chile, 1981-1999," Working Papers Central Bank of Chile 79, Central Bank of Chile.
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