Another Pass-Through Bites the Dust? Oil Prices and Inflation

This paper presents evidence of an important decline during recent decades in the pass-through from the price of oil to the general price level. We find that this decline is a generalized fact for a large set of countries. After documenting correlations between the consumer price index and oil prices, we use two estimation strategies in an attempt to properly identify the effect of oil shocks on inflation. First, we estimate the traditional Phillips curve augmented to include oil and test for structural breaks in 34 countries. This methodology shows a fall in the average estimated passthrough for industrial economies and, to a lesser degree, for emerging economies. Second, we estimate rolling vector autoregressions for a subsample of countries for which we have sufficient data. We derive impulse response functions of inflation to oil shocks and interpret the integrals as estimates of pass-through. We find that the effect of oil shocks on inflation has weakened for most of the 12 countries in the sample. Among the factors that might help to explain this decline, we argue that the most important are a reduction in the oil intensity of economies around the world, a reduction in the exchange rate pass-through, a more favorable inflation environment, and the fact that the current oil price shock is largely the result of strong world demand. These factors help to explain not only why the current shock has had limited inflationary effects, but also why it has had limited consequences for output.

Inflation Targets and Stabilization in Chile

Chile was among the first countries to adopt an inflation target. Its long inflation history had led to widespread backward-looking indexation in goods, labour, and financial markets as well as in policy instruments. While indexation exacerbates inflation inertia, this paper provides evidence that adoption of inflation targets by an autonomous Central Bank since 1990 has made possible a regime change reflected in gradual inflation convergence toward international levels. Assessing Chile’s targeting experience in an international context and analyzing the conduct of monetary policy in Chile provides the background for understanding its recent stabilization experience. A simple dynamic model illustrates the role and macro effects of inflation targeting in a highly indexed open economy. VAR estimations for inflation, inflation targets, and related macro variables support the notion that the introduction of forward-looking inflation targets has contributed to breaking inflation expectations, paving the way for Chile’s convergence to sustained lower inflation and reducing the influence of indexation albeit most indexation mechanisms are still in place.

A theoretical and empirical exploration into the heterogeneous fragility of Chilean firms and workplaces

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2006.Includes bibliographical references (p. 126-128).This dissertation consists of three essays on the heterogeneous reactions of firms to shocks, with particular empirical applications to the Chilean economy. The first essay presents a model of heterogeneity in an economy with financial constraints. The main issue in the model is to characterize the entrepreneurs and firms that are affected by shocks or policy innovations. The model delivers a dual margin composed of a segment of relatively poorer but more productive entrepreneurs and a segment of richer but less productive entrepreneurs. The main result we present in this essay is that these two margins will react heterogeneously to shocks in economically meaningful ways. The second essay is devoted to the construction of the panel and the econometric use of the FUNDES-SII panel firm database. We use this database to study firm creation, destruction and performance on maps of firms. The main result of this essay is that there does seem to be some empirical evidence of a margin of high productivity, low capital entrepreneurs for the Chilean economy, as predicted in the first essay of the thesis. Finally, we find that among smaller firms leverage seems to be an indicator of financial constraint, while among larger firms it is an indicator of financial access.(cont.) The third essay is devoted to the construction of the panel and econometric use of the INE-BFL panel worker database to study workplace creation and destruction in Chile. For local interest, the main feature of the chapter is that it is the first time that representative and consistent series of job creation and destruction that is made available for the Chilean economy. The main feature of the chapter, however, is the estimation and characterization of workplace fragility by firm size. We estimate separation, matching and bankruptcy probabilities, and inquire into their sensitivity to the economic cycle.by Oscar Landerretche.Ph.D

Lending Booms: Latin America and the World

Recent theories of crisis put lending booms at the root of financial collapses. Yet lending booms may be a natural consequence of economic development and fluctuations. So are lending booms dangerous? In this paper, we investigate empirically this question using a broad sample of lending boom episodes over 40 years, with a special eye for Latin America. Our results indicate that (1) lending booms are often associated with (i) a domestic investment boom; (ii) an increase in domestic interest rates; (iii) a worsening of the current account; (iv) a declines in reserves; (v) a real appreciation; (vi) a decline in output growth, (2) 'typical' lending booms do not increase substantially the vulnerability of the banking sector or the balance of payments. Comparing Latin America and the rest of the world, we find that Latin America lending booms make the economy considerably more volatile and vulnerable to financial and balance of payment crisis.

El Consejo del Trabajo y la Equidad: vislumbrando nuestro potencial

Executive Secretary of the Advisory BoardPresidential Work and Equity; Academicof the Department of Economics and Directorof the Master's in Public Policies of theUniversity of ChileEx Secretario Ejecutivo del Consejo AsesorPresidencial Trabajo y Equidad; Académicodel Departamento de Economía y Directorde la Maestría en Políticas Públicas de laUniversidad de Chil