Monetary Policy Nominalization in Chile: an Evaluation

Rodrigo Fuentes, Alejandro Jara, Klaus Schmidt-Hebbel and Matias Tapia

Journal Economía Chilena (The Chilean Economy), 2003, vol. 6, issue 2, 5-35

Abstract: In August of 2001, the Central Bank of Chile modified its main monetary policy instrument, the inflation-indexed monetary policy interest rate MPR it had used so far, to a nominal or peso-denominated rate. A number of consequences, both in the conduct of monetary policy and in the country’s financial markets, can be associated to this new way of taking monetary policy actions. This article evaluates such effects, providing theoretical support and evidence to several hypotheses, some of them found in the existing literature. The main contribution of this so-called “nominalization”—that has not been discussed earlier—is that it extends the scope of operation of monetary policy, something that becomes important when both the interest rate and the inflation rate are low, as is the case today.

Date: 2003
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