Monetary Policy in Chile: a black box?

Abstract

This paper studies monetary policy in Chile during the 1986-1997 period. We concentrate in understanding the monetary transmission mechanism by which the Central Bank instrument—the real interest rate—affects total expenditure, output and the inflation rate. The methodology used is structural VARS. We find a weak effect of the interest rate on all the variables. The interest rate has a significant effect on the expenditure-output gap. Both the interest rate and the expenditure-output gap have a significant effect on the price of non-traded goods, in line with the dependent economy model (the Australian model).