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The Art and Science of Monetary and Fiscal Policies in Chile

Author

Listed:
  • Medina, Juan Pablo
  • Toni, Emiliano
  • Valdes, Rodrigo
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.

Suggested Citation

  • Medina, Juan Pablo & Toni, Emiliano & Valdes, Rodrigo, 2023. "The Art and Science of Monetary and Fiscal Policies in Chile," MPRA Paper 117198, University Library of Munich, Germany, revised 28 Apr 2023.
    • Handle: RePEc:pra:mprapa:117198
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    References listed on IDEAS

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    More about this item

    Keywords

    DSGE Model; Fiscal and Monetary Policies; Macroeconomic stabilization; Chile.;
    All these keywords.

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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