Business Cycle Dynamics and Shock Resilience in Chile

Abstract

In this paper we use a VAR model to analyze the response of the Chilean business cycle to shocks and the capacity of the Chilean economy to withstand them (resilience). Novel features in the analysis include the introduction of an expanded set of variables to capture the impact of external shocks and domestic shocks —including policy variables; the use of an extended sample since the 1950s; and the introduction of block exogeneity to capture the small open economy feature and to better deal with identification issues. Among key results, we find that foreign shocks have been the dominant source of business cycle fluctuations, followed by monetary policy shocks, while fiscal policy shocks explain relatively little; and that despite of the increased synchronization of the domestic business cycle with international conditions, the resilience of the Chilean economy to external shocks has increased during the nineties, with countercyclical policies playing an important role in such a positive development