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The “Great Moderation” and the Monetary Transmission Mechanism in Chile

  • Cristina Betancour
  • Jose De Gregorio
  • Juan Pablo Medina

This paper analyzes the significant reduction in the volatility of output growth and inflation seen in the Chilean economy in the present decade. This reduced volatility, sometimes called the “great moderation,” coincides with several important changes to the Chilean macroeconomic framework, including the establishment of a full-fledged inflation targeting regime for monetary policy and a rule based on a target for the structural fiscal surplus. The paper examines the impact of these changes on the monetary transmission mechanism and explores how the “great moderation” has been affected by economic shocks and by the endogenous response of policy as reflected in the monetary transmission mechanism. The paper also reports results of a monetary vector autoregression model that finds important changes in the way shocks are transmitted to the Chilean economy.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 393.

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Date of creation: Dec 2006
Date of revision:
Handle: RePEc:chb:bcchwp:393
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  1. Jose De Gregorio, 2004. "Productivity Growth and Disinflation in Chile," NBER Working Papers 10360, National Bureau of Economic Research, Inc.
  2. Frederic S. Mishkin, 1996. "The Channels of Monetary Transmission: Lessons for Monetary Policy," NBER Working Papers 5464, National Bureau of Economic Research, Inc.
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  4. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1994. "The Financial Accelerator and the Flight to Quality," Working Papers 94-24, C.V. Starr Center for Applied Economics, New York University.
  5. Juan Pablo Medina & Claudio Soto, 2007. "Copper Price, Fiscal Policu and Business Cycle in Chile," Working Papers Central Bank of Chile 458, Central Bank of Chile.
  6. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  7. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  8. José De Gregorio & Alejandro Jara & Cristina Betancour, 2006. "Improving the Banking System: The Chilean Experience," Economic Policy Papers Central Bank of Chile 16, Central Bank of Chile.
  9. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
  10. Rodrigo Alfaro & Helmut Franken & Carlos García & Alejandro Jara, 2003. "Bank Lending Channel and the Monetary Transmission Mechanism: the Case of Chile," Working Papers Central Bank of Chile 223, Central Bank of Chile.
  11. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
  12. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
  13. José De Gregorio, 2001. "La Política Cambiaria," Economic Policy Papers Central Bank of Chile 02, Central Bank of Chile.
  14. Bernanke, Ben S. & Gertler, Mark & Waston, Mark, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Working Papers 97-25, C.V. Starr Center for Applied Economics, New York University.
  15. Jorge Roldos, 2006. "Disintermediation and Monetary Transmission in Canada," IMF Working Papers 06/84, International Monetary Fund.
  16. Verónica Mies & Felipe Morandé & Matías Tapia, 2002. "Política Monetaria y Mecanismos de Transmisión: Nuevos Elementos para una Vieja Discusión," Working Papers Central Bank of Chile 181, Central Bank of Chile.
  17. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 561-586, June.
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