Macroeconomic constraints for medium term growth and distribution : a model for Chile

The recovery of the Chilean economy since the mid 1980s, has certainly been successful in macroeconomic terms. In fact, the restoration of growth and the correction of external imbalances after the severe economic crises of 1982 -83 has taken place in a macroeconomic environment of moderate inflation, without major fiscal imbalances, exports have expanded significantly and foreign debt burden indicators have improved. However, distributive and poverty related indicators point to pending problems. The major challenge, therefore, is to maintain sustainable rates of economic growth, address the social issues of poverty reduction and improve income distribution patterns, while preserving macroeconomic and financial stability. The paper is organized as follows : Section I is an introduction. Section II presents a formal macroeconomic model that identifies major constraints ( external, savings and fiscal ) that shape the scope for growth. In Section III the model is numerically calibrated with parameters of the economy and three policy exercises are explored : i) an increase in public spending; ii) a reduction of interest payments of 3 of potential GDP; and iii) a reduction of the markup rate of 4. Section IV reviews various policy excercises and the conclusions are summarized in Section V.