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The Chilean Business Cycles Through the Lens of a Stochastic General Equilibrium Model

  • Juan Pablo Medina
  • Claudio Soto

This paper uses an estimated dynamic stochastic general equilibrium model with nominal and real rigidities, to describe the sources of business cycle fluctuations in Chile. Our results show that foreign shocks and domestic supply shock account for a large share of output fluctuations over the last 20 years. Relatively tight domestic monetary conditions have contributed to contain inflationary pressures arising from other shocks, namely a slowdown in productivity by mid 90s. Foreign factors are also behind the large swings exhibited by the real exchange rate, although a monetary contraction in 1998 explains part of the delayed adjustment of the exchange rate in response to effects of the Asian crisis. The tight monetary policy around 1998 also contributes to the slow recovery of the employment afterwards.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 457.

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Date of creation: Dec 2007
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Handle: RePEc:chb:bcchwp:457
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  1. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
  2. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
  3. Thomas Lubik & Wing Teo, 2005. "Do World Shocks Drive Domestic Business Cycles? Some Evidence from Structural Estimation," Economics Working Paper Archive 522, The Johns Hopkins University,Department of Economics.
  4. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  5. Juan Pablo Medina & Anella Munro & Claudio Soto, 2007. "What Drives the Current Account in Commodity Exporting Countries? The Cases of Chile and New Zealand," Working Papers Central Bank of Chile 447, Central Bank of Chile.
  6. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Closing Small Open Economy Models," NBER Working Papers 9270, National Bureau of Economic Research, Inc.
  7. Schmidt-Hebbel, Klaus & Tapia, Matias, 2002. "Inflation targeting in Chile," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 125-146, August.
  8. DeJong, David N. & Ingram, Beth F. & Whiteman, Charles H., 2000. "A Bayesian approach to dynamic macroeconomics," Journal of Econometrics, Elsevier, vol. 98(2), pages 203-223, October.
  9. Rodrigo Caputo, 2004. "Exchange Rates, Inflation and Monetary Policy Objectives in Open Economies: The Experience of Chile," Econometric Society 2004 Latin American Meetings 298, Econometric Society.
  10. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
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