Output and inflation volatility has declined significantly in recent years. This improved economic behavior can be explained by both a reduction in the shocks faced by the country and a better monetary policy conduct. This paper explores the contribution of both factors to boosting Chile’s economic performance in the past fifteen years through three measures derived from the economy’s efficiency frontier. The measure capturing macroeconomic behavior presents an improvement (decline) of 200% between the periods 1992-2000 and 2001-2007—reflecting the reduction in output and inflation volatility—a fact that is explained by a reduction in the shocks (123%), and by by monetary policy efficiency gains (83%). Furthermore, between 2001 and 2006, the Chilean economy experienced the smallest magnitude of shocks since 1992, while the monetary policy was responsible for keeping the economy above the efficiency frontier.
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Article provided by Central Bank of Chile in its journal Economía Chilena.