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Asymmetric Monetary Policy Rules and the Achievement of the Inflation Target: The Case of Chile

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Author Info
Fabián Gredig
Abstract

The purpose of this paper is to test empirically whether the Central Bank of Chile (CBC) has a monetary policy reaction that changes depending on the actual state of the economy. For that, we estimate a threshold model for the CBC’s policy rule that allows the existence of two policy regimes according to whether the output gap, the inflation deviation or the GDP growth is above or below a threshold value. Also, we assess the possible effects of estimated monetary policy rules in the achievement of the inflation target by simulating a standard New Keynesian Model with endogenous switching parameters. Estimations show that the monetary authority responds strongly to inflation deviations but weakly to the output gap when the gap is larger than a specific threshold value. Furthermore, there is statistical evidence that the CBC reacts faster moving the interest rate under expansion periods. These results are robust when assuming an unknown threshold value and to real-time estimation. Simulations revealthat the estimated monetary policy rule may induce an asymmetric behavior in the inflation rate and a small negative inflation bias.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 451.

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Date of creation: Dec 2007
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Handle: RePEc:chb:bcchwp:451

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  1. Özer Karagedikli & Kirdan Lees, 2004. "Do inflation targeting central banks behave asymmetrically? Evidence from Australia and New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP 2004/02, Reserve Bank of New Zealand. [Downloadable!]
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  5. Trehan, Bharat & Wu, Tao, 2007. "Time-varying equilibrium real rates and monetary policy analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1584-1609, May. [Downloadable!] (restricted)
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  15. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  16. repec:cup:etheor:v:20:y:2004:i:05:p:813-843 is not listed on IDEAS
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  18. Christopher Martin & Costas Milas, 2004. "Modelling Monetary Policy: Inflation Targeting in Practice," Economica, London School of Economics and Political Science, vol. 71(281), pages 209-221, 05. [Downloadable!] (restricted)
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  19. Juan Dolado & Ramón Pedrero & Francisco Ruge-Murcia, 2004. "Nonlinear Monetary Policy Rules: Some New Evidence for the U.S," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 8(3), pages 1155-1155. [Downloadable!] (restricted)
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  20. Antulio N. Bomfim, 2001. "Measuring equilibrium real interest rates: what can we learn from yields on indexed bonds?," Finance and Economics Discussion Series 2001-53, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  24. Alex Cukierman & Stefan Gerlach, 2003. "The inflation bias revisited: theory and some international evidence," Manchester School, University of Manchester, vol. 71(5), pages 541-565, 09. [Downloadable!] (restricted)
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  25. Pablo Gonzalez & Mauricio Tejada, 2006. "No linealidades en la regla de política monetaria del Banco Central de Chile: una evidencia empírica," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Economics Department, vol. 21(1), pages 81-115, July. [Downloadable!]
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  26. Dolado, Juan J. & Maria-Dolores, Ramon & Naveira, Manuel, 2005. "Are monetary-policy reaction functions asymmetric?: The role of nonlinearity in the Phillips curve," European Economic Review, Elsevier, vol. 49(2), pages 485-503, February. [Downloadable!] (restricted)
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