Empirical Puzzles of Chilean Stabilization Policy
Empirical Puzzles of Chilean Stabilization Policy
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Date
1998-03-05
Authors
Calvo, Guillermo A.
Mendoza, Enrique G.
Advisor
Citation
Guillermo A. Calvo and Enrique G. Mendoza, "Empirical Puzzles of Chilean Stabilization Policy" published in Chile, Recent Policy Lessons and Emerging Challenges, ed. by G. Perry and D.M. Leipziger, Washington, D.C., The World Bank, 1999, pp. 25-54.
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Abstract
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.
Notes
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.