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General Equilibrium Dynamics of External Shocks and Policy Changes in Chile

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  • Francisco A. Gallego
  • Klaus Schmidt-Hebbel
  • Luis Servén

Abstract

This paper develops a macroeconomic general-equilibrium model fully parameterized for the Chilean economy. The model’s basic relations are derived from intertemporal optimization by a group of rational forward-looking agents. The model also adds critical real-world features – such as short-run wage rigidities and a group of myopic agents – that generate deviations from the frictionless fullemployment equilibrium of the unconstrained neoclassical paradigm. The model is numerically simulated to illustrate the dynamics of Chile’s economy in response to the external shocks and policy shifts that led to the 1998-99 recession.

Suggested Citation

  • Francisco A. Gallego & Klaus Schmidt-Hebbel & Luis Servén, 2004. "General Equilibrium Dynamics of External Shocks and Policy Changes in Chile," Working Papers Central Bank of Chile 271, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:271
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    References listed on IDEAS

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    2. Serven, Luis, 1995. "Capital goods imports, the real exchange rate and the current account," Journal of International Economics, Elsevier, vol. 39(1-2), pages 79-101, August.
    3. Vittorio Corbo & José Tessada, 2002. "Growth and Adjustment in Chile: A Look at the 1990s," Central Banking, Analysis, and Economic Policies Book Series,in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Economic Growth: Sources, Trends, and Cycles, edition 1, volume 6, chapter 14, pages 465-522 Central Bank of Chile.
    4. Fair, Ray C & Taylor, John B, 1983. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 51(4), pages 1169-1185, July.
    5. Schmidt-Hebbel, Klaus & Serven, Luis, 1994. "Fiscal policy in classical and Keynesian open economies," Policy Research Working Paper Series 1299, The World Bank.
    6. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, March.
    7. Corbo, Vittorio & Schmidt-Hebbel, Klaus, 1991. "Public policies and saving in developing countries," Journal of Development Economics, Elsevier, vol. 36(1), pages 89-115, July.
    8. 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.
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    15. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
    16. César Calderón M. & Francisco Gallego Y., 2002. "La Tasa de Interés Real Neutral en Chile," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 5(2), pages 65-72.
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