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Growth and Adjustment in Chile: a Look at the 1990s

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Author Info
Vittorio Corbo
José A. Tessada

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Abstract

This study provides a thorough review of the post-1998 slowdown in economic growth in Chile. This was a rather turbulent period in economic history, and as such, it motivates to carry on research on the likely causes of the slowdown and its possible solutions. The authors use an econometric model to test three competing hypotheses and derive general implications from the analysis. The first hypothesis puts the blame on bad luck, because of external shocks: namely, terms-of-trade losses and reduced capital inflows following the Asian crisis. A second hypothesis blames the slowdown on policies implemented as a response to the deteriorating external conditions, in particular the inability to achieve a balanced mix of monetary and fiscal policies during the 1997–1998 period. Fiscal imbalances and restrictive monetary policy, it is argued, led to very high interest rates, severely affecting the investment and consumption decisions of the private sector. Finally, a third explanation is that the lowdown resulted from the completion of a high growth cycle associated with the structural reforms introduced in the 1985–1995 period. The authors conclude that the slowdown in the Chilean economy was a mix of severe external shocks and lack of cooperation between fiscal and monetary policies.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 204.

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Date of creation: Feb 2003
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Handle: RePEc:chb:bcchwp:204

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  18. Rodrigo Fuentes & Alejandro Jara & Klaus Schmidt-Hebbel & Matías Tapia & Erika Arraño, 2003. "Efectos de la Nominalización de la Política Monetaria en Chile," Working Papers Central Bank of Chile 197, Central Bank of Chile. [Downloadable!]
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  1. Francisco A. Gallego & Klaus Schmidt-Hebbel & Luis Servén, 2004. "General Equilibrium Dynamics of External Shocks and Policy Changes in Chile," Working Papers Central Bank of Chile 271, Central Bank of Chile. [Downloadable!]
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