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