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The art and science of monetary and fiscal policies in an emerging economy

Juan Pablo Medina, Emiliano Toni and Rodrigo Valdés

Economic Modelling, 2025, vol. 152, issue C

Abstract: Assessing alternative macroeconomic policy frameworks presents significant challenges, as outcomes are often obscured by specific shocks and deviations from intended policy rules. These challenges are particularly pronounced in comprehensive framework overhauls. Using Chile as a case study, we examine two distinct policy regimes, focusing on the 2000 transition from a managed exchange rate to a floating exchange rate, combined with flexible inflation targeting and a more countercyclical fiscal policy. To quantify the contributions of these policy changes to economic stability, we employ a structural model tailored to the Chilean economy. We distinguish between the effects of shocks (luck), systematic policy actions (science), and deviations from implicit policy rules (art) on business cycle volatility. Our findings indicate that monetary and fiscal reforms (science) significantly reduced volatility in both GDP and inflation. Moreover, deviations from implicit policy rules (art) also contributed to macroeconomic stabilization. These results offer valuable insights for emerging markets and commodity-exporting economies.

Keywords: Fiscal policy; Monetary policy; Macroeconomic stabilization; DSGE model; Chile (search for similar items in EconPapers)
JEL-codes: C54 E32 E37 E52 E62 F41 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:152:y:2025:i:c:s0264999325002433

DOI: 10.1016/j.econmod.2025.107248

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