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Fiscal and Monetary Policy Rules: The Recent Chilean Experience

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  • Macarena García
  • Pablo García
  • Bernardita Piedrabuena

Abstract

This paper describes monetary and fiscal rules used in Chile in recent years. On monetary policy rules, we present both the framework for monetary policy rate assumptions that guide the construction of inflation and growth forecasts, as well as the broad characteristics of Taylor-Type Rules that reflect recent monetary policy actions. The role of the assumptions on the neutral policy rate as well as issues as what inflation index or time horizon to consider are included in the discussion. On fiscal rules, this paper presents the structural balance methodology used by the Chilean public sector since 2001. This rule implies that expenditures should evolve according to the dynamics of structural fiscal income, which is consistent with full employment and a long-term copper price. The key assumptions underlying the trend GDP growth and the long-term copper price are not set in a discretional way but rather follow the recommendations of two panels of independent experts. We conclude with a positive assessment of the recent Chilean experience with monetary and fiscal policy rules. This positive assessment is driven by the prominent role of monetary policy as the stabilizing macroeconomic instrument under a credible inflation targeting regime, and the avoidance of pro cyclical fiscal policies. In spite of tumultuous external conditions between 1999 and 2003, the Chilean economy managed to sustain positive rates of growth, record-low domestic interest rates and sovereign spreads, stable external public debt, as well as low inflation. The recent upswing in 2004 and 2005 has been accompanied by a smooth normalization of monetary conditions and a substantial improvement in fiscal balances.

Suggested Citation

  • Macarena García & Pablo García & Bernardita Piedrabuena, 2005. "Fiscal and Monetary Policy Rules: The Recent Chilean Experience," Working Papers Central Bank of Chile 340, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:340
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_340.pdf
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    References listed on IDEAS

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    1. Frederic Mishkin & Klaus Schmidt-Hebbel, 2002. "A Decade of Inflation Targeting in the World: What Do We Know and What Do We Need to Know?," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.),Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 4, pages 171-220, Central Bank of Chile.
    2. Eric Parrado & Andrés Velasco, 2002. "Alternative Monetary Rules in the Open Economy: A Welfare-Based Approach," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.),Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 7, pages 295-348, Central Bank of Chile.
    3. repec:pri:cepsud:84svensson is not listed on IDEAS
    4. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
    5. Rodrigo Caputo, 2004. "Exchange Rates, Inflation and Monetary Policy Objectives in Open Economies: The Experience of Chile," Econometric Society 2004 Latin American Meetings 298, Econometric Society.
    6. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One Decade of Inflation Targeting in the World: What Do We Know and What Do We Need to Know?," NBER Working Papers 8397, National Bureau of Economic Research, Inc.
    7. Schmidt-Hebbel, Klaus & Tapia, Matias, 2002. "Inflation targeting in Chile," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 125-146, August.
    8. repec:bla:jfinan:v:58:y:2003:i:2:p:867-894 is not listed on IDEAS
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    2. Carmignani, Fabrizio, 2010. "Cyclical fiscal policy in Africa," Journal of Policy Modeling, Elsevier, vol. 32(2), pages 254-267, March.

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