A Decade of Inflation Targeting in Chile: Developments, Lessons, and Challenges

Chile was among the first countries in the world to adopt a monetary framework based on an explicit, publicly announced, annual inflation target, when the term "inflation targeting" had not been even formalized. The country’s inflationary past suggested to combine tough inflation targeting parameters (to enhance the Central Bank’s reputation) and a gradual transition from moderately high inflation to a long-run inflation goal of 3%. After attaining this long-run objective in 1999 and a reputation of inflation-averse, the Central Bank of Chile has moved toward flexibility along the credibility-flexibility trade-off. Finally, having a third objective in the form of an asymmetric threshold for the current-account deficit was reflected in some episodes during which the implicit short-run output stabilization objective was made less important. Notwithstanding the success in reducing inflation during the 90s, without apparently paying real costs, the current inflation target regime faces a few challenges in its quest for keeping a low and stable inflation.

Exchange Rate Policy in Chile: the Abandonment of the Band and the Floating Experience

As many countries worldwide, Chile has experienced virtually all the menu of options of exchange rate policies in the last forty years—with the sole exception of giving up its national currency. The quest for a reasonable exchange rate policy has been inspired in part by the different goals that, throughout these four decades, policymakers have attempted to achieve with this policy. After almost a decade of inflation targeting coexisting with an exchange rate band, in 1999 the Central Bank of Chile gave up the band and replaced it with a policy of floating. This paper deals with two main questions: (a) Why was the band abandoned and, by the same token, why did it last so long? and (b) How has the floating regime worked so far? The latter question involves accounting for the possible appearance of “fear of floating” by macroeconomic authorities, as well as evaluating the regime in three issues highlighted by the critics of exchange rate floating: passthrough to domestic prices, exchange rate volatility and balance sheet effects.

Alternative monetary schemes: a positive evaluation for the chilean peso

The choice between maintaining or giving up the national currency is determined by putting on balance the benefits of macroeconomic flexibility derived from a floating exchange rate and an independent monetary policy, and the microeconomic benefits derived from joining a currency union or adopting unilaterally a foreign currency. This paper assesses this choice for Chile. The country's financial development and macroeconomic stability imply low microeconomic and efficiency costs in sticking to the peso. Optimal currency-area criteria show that Chile is not a natural candidate for joining a monetary union with prospective partners in Latin America, NAFTA, or the European Union. Unilateral dollarization is even less beneficial. Among Southern Hemisphere countries with various exchange rate regimes, Chile would gain the least from giving up its national currency. For a country like Chile, subject to large idiosyncratic shocks and significant temporary price and wage rigidity, a flexible exchange rate and an independent monetary policy anchored to an inflation target comprise the dominant regime choice

Monetary Policy and Transmission Mechanisms: New Elements for an old Debate

This article begins by reviewing the current state of the arts in monetary transmission, focusing on the empirical evidence for the Chilean case. Then, it highlights two aspects that have not been given much attention in previous studies, namely the evolution of the monetary policy impact on output and prices over the past decade, and its breakdown by sector. A basic uniequational model is estimated, in order to study i) temporary shifts in the effectiveness of monetary policy and ii) shifts in regimes occurred in the late nineties. Then, VAR models are used—similar to those of previous studies—to analyze impulse-response functions. Finally, a comparative analysis is made on the impact of monetary policy on various productive sectors, for which output and price variables are incorporated into the traditional VAR model.

Sources of Uncertainty in Monetary Policy Conduct in Chile

This paper analyzes the quantitative relevance of additive and multiplicative uncertainties, and in data for monetary policy conduct in Chile. The analysis on data uncertainty focuses on the uncertainty associated with output gap estimation using real-time data and several known methods for estimating trend output. We find that revisions to the output gap are important and persistent, and that the methods based on unobservable component are those that perform with real-time data with respect to the more common ones, such as the HP filter. For the cases of additive and multiplicative uncertainties, the equations that rule the economy’s behavior are estimated with time-varying parameters and with state-dependent variances in the model’s shocks. This allows analyzing the contribution of these two types of uncertainty to total uncertainty. We find that the additive uncertainty is the most relevant in explaining total uncertainty and that the model’s shocks are state dependent.

Volatilidad cambiaria y contratos laborales traslapados.

En un esquema de salarios que se determinan escalonadamente, políticas monetarias "muy" acomodaticias respecto de shocks salariales redundan en un tipo de cambio nominal volátil. La volatilidad del tipo de cambio real, sin embargo, se exacerba ante intentos de la autoridad económica por estabilizar los precios. En consecuencia, el conflicto entre estabilidad de salarios y estabilidad del producto en Taylor (1979) se extiende a un conflicto de estabilidades de variables nominales (salario, tipo de cambio nominal) vs. Variables reales (producto, tipo de cambio real)