The Art and Science of Monetary and Fiscal Policies in Chile

Juan Medina, Emiliano Toni and Rodrigo Valdes

MPRA Paper from University Library of Munich, Germany

Abstract: There is consensus that Chile has made substantial progress in its macroeconomic policies during the last 30 years. However, there is no comprehensive and formal quantification of the macroeconomic stabilization gains in terms of the critical dimensions in the conduct of monetary and fiscal policies. In this work, we make an effort to quantify these gains using a structural model that incorporates essential features of the Chilean economy, disentangling the role of changes in policies and shocks in shaping the business cycles. We pay particular attention to two simultaneous and significant policy regime changes. In 2000, Chile moved from a managed exchange rate regime to a floating one coupled with flexible inflation targeting. On fiscal, policy shifted to a more countercyclical budget, changing a the-facto nominal target for a structural one. Policies also deviated from their implicit rules in the old and the new regimes—the ``art" policy component. Fitting the model to the Chilean data through Bayesian techniques in the period 1990-2015, we find that a flexible exchange rate regime and a countercyclical fiscal rule enhance each other in terms of lowering macroeconomic volatility, especially those arising from commodity prices and other critical economic shocks. Together, the monetary and budgetary reforms attenuated both GDP and inflation's volatility considerably in 2000-2015 (compared to the counterfactual based on the 90's policies). The art part also contributed substantially to lowering macro volatility, especially fiscal policy deviations on GDP volatility. For the 90s, the counterfactuals using the new policy framework also show lower volatility and an even more relevant role for policy deviations.

Keywords: DSGE Model; Fiscal and Monetary Policies; Macroeconomic stabilization; Chile. (search for similar items in EconPapers)
JEL-codes: C54 E32 E37 E52 E62 F41 (search for similar items in EconPapers)
Date: 2023-04-28, Revised 2023-04-28
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:117198

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