NEW KEYNESIAN MODELS FOR CHILE DURING THE INFLATION TARGETING REGIME: A STRUCTURAL APPROACH

Abstract

Knowing the frictions that are present in the economy is a key step towards the efficient design of policy actions. In particular, price and wage rigidities determine the degree of tradeoff between output and inflation stabilization that central banks face. In this context, the main purpose of this paper is to determine the importance of nominal and real rigidities in the Chilean economy. In doing so, we derive and estimate a dynamic stochastic general equilibrium (DSGE) model for the Chilean economy. We find that several rigidities are present in the Chilean economy and, in particular, that the degree of wage stickiness is higher than that of prices. Furthermore, imperfect passthrough from exchange rate to import prices is an important feature of the Chilean economy. The subsample analysis suggests that some rigidities and policy reactions may have changed. Those changes may be related to a more credible monetary policy.