PRICE INFLATION AND EXCHANGE RATE PASS-THROUGH IN CHILE (original) (raw)

The evolution of inflation in Chile since 2000

RePEc: Research Papers in Economics, 2016

We analyse the evolution of inflation in Chile over the last decade and a half through the lenses of the new keynesian theory. We do this first by reviewing the evidence relating to the main channels put forward by this framework: the output gap, inflation expectations, indexation to past inflation and the exchange rate. Based on the evidence gathered, we provide an interpretation of the inflation process in Chile. We show that in general terms the evolution of inflation can be explained consistently by the evolution of those elements. Critical to our finding is a differentiation of the dynamics of goods and services inflation.

Price and wage inflation in Chile

Price and wage equations based on a model of imperfect competition were estimated using data from 1986:1 to 2000:4. From the estimations we can conclude: (i) as expected, productivity reduces unit labour costs and inflation and increases real wages; (ii) the findings of other studies are confirmed in the sense that the output gap and unemployment have a low impact on inflation due to widespread indexation; (iii) inflation imposes substantial costs on firms and workers; (iv) the exchange rate passthrough depends positively on economic activity and the inflation level, explaining why pass-through has been so low in recent years. Since inflation has been stabilised at around 3%, pass-through should be permanently lower than in the 1990s.

Reducing Inflation: The Chilean Experience

1998

The main purpose of this paper is to analyze the process by which Chile was able to reduce inflation during the 1990s. In this period inflation was gradually reduced from close to 30% per annum in 1990 to only 6% in 1997. The paper concludes that three factors were important in helping to accomplish this performance. First, the independent Central Bank and its tough actions early onto convey the message that it was ready to stand behind its mandate (to reduce inflation)-helped to shape inflationary expectations and in the process it led to lower wage inflation and ultimately a lower path for core inflation. Second, a restrictive monetary policy, and the foreign exchange intervention policies associated with it, resulted in a trajectory of the nominal exchange rate much below what would have been observed under a PPP rule adjusted for differences in productivity. This result was reinforced by the low credibility of the band reflected in the effect of the location of the exchange rate within the band on the observed rate. Third, the higher rate of growth of labor productivity, given the wage equation, resulted in a lower rate of growth of unit labor cost than otherwise. From these three effects the first effect, the enhanced credibility of the new policy operating through the formation of inflation expectations, was found to be the most important factor behind the success in reducing inflation rate. 4.1. The Wage Equation 4.2. Exchange Rate Equation 4.3. Completing the Model 4.4.

Exchange rate pass-through and inflation targets in Chile

CEPAL Review, 2016

Using quarterly data on the Chilean economy from 1986 to 2009, this article looks at the effect of gradual implementation of an inflation-targeting regime on exchange rate passthrough to prices. Initially, the introduction of inflation-targeting contributes to substantial reductions in the pass-through coefficient. However, in the second phase of implementation, once the monetary authority extends the policy horizon and introduces greater flexibility into the exchange rate system, the pass-through coefficient rises sharply. The findings of this study show that exchange rate pass-through to prices, in addition to being sensitive to the inflationary environment, is closely tied to the rules of the game that shape the monetary policy framework.

The pass-through from depreciation to inflation: Chile 1986-2001

Estudios de economía, 2003

How to cite Complete issue More information about this article Journal's homepage in redalyc.org Scientific Information System Network of Scientific Journals from Latin America, the Caribbean, Spain and Portugal Non-profit academic project, developed under the open access initiative The Pass-through from Depreciation… / Carlos Noton Norambuena

The Monetary Transmission Mechanism in Chile: A Medium-Sized Macroeconometric Model

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Credibility and Inflation Targeting in Chile1

2000

In this paper we present some new evidence that indicates that the inflationary dynamics for the Chilean economy have changed in recent years. We show that price rigidity has increased while at the same time the degree of indexation based on past inflation has decreased over time. We also show that the pass-through from exchange rate to traded good inflation

Banco Central de Chile Documentos de Trabajo Central Bank of Chile Working Papers

2009

This paper makes an empirical contribution to the discussion on the optimal exchange rate regime. Using as a study case the experience of the Central American countries, we compare the dynamics of the Real Exchange Rate (RER) and inflation persistence between dollarized economies and countries with some degree of exchange rate flexibility. Our results show that the two dollarized countries in the region, El Salvador and Panama, are quite different in terms of RER and inflation dynamics. While in El Salvador the RER spends more time away from the equilibrium level than the non-dollarized countries in the region, the opposite is true for Panama. We also find that inflation persistence in El Salvador is similar to that of the other countries, but smaller in Panama. This leads us to the conclusion that some degree of exchange rate flexibility helps countries to have a RER more aligned with its fundamentals. Nevertheless, a long-lived, highly credible dollarized economy, like Panama, can...