Empirical Puzzles of Chilean Stabilization Policy
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This paper reviews Chilean stabilization policy during the 1990s and argues that, while the merits of Chilean policy should be praised, there are four puzzles in conventional interpretations of the Chilean experience worth studying. First, the policy of targeting indexed interest rates does not coincide with a policy of targeting real interest rates. Second, there is no systematic link between the decline in inflation and the upward adjustments in indexed interest rates. Third, changes in the exchange rate and in the performance of the external sector help explain the decline in inflation. Fourth, the strong cyclical growth of the real economy was influenced in part by the large and persistent increase in the world price of Copper. We provide statistical evidence favoring these arguments using recursively-identified vector-autoregression models, and sketch a model of staggered pricing under indexation that sheds some light on the Chilean case.
This paper was prepared for the seminar on Chile Development Lessons and Challenges organized by the Economic Development Institute of the World Bank and held in Washington D.C., December 17-18, 1997.