How Well Does a Monetary Dynamic Equilibrium Model Account for Chilean Data?
The purpose of this paper is to figure out how well a money-in-the-utility-function model with a Taylor rule can match Chilean data, specially some monetary stylized facts. A dynamic stochastic general equilibrium model is formulated, solved and calibrated to evaluate its ability to replicate the main features of the Chilean economy in the 1986-2000 period. In particular, it focuses on a possible explanation to what the empirical literature calls the "price puzzle", the co-movement between interest rate and inflation. The solution of the model is adequately achieved through a perturbation method (second-order approximation). A positive transitory policy interest rate shock causes: (1) a temporary (non-significant) decline in output, (2) a decrease in real money balances, and (3) a temporary increase in the inflation rate. These findings are relatively consistent with those obtained from impulse-response functions estimated for Chile. Therefore, the theoretical model proposed is able to explain and reproduce the co-movement between interest rate and inflation. This relationship is caused by a Fisher effect and strengthened by the presence of a Taylor rule that depends positively on inflation deviation from its steady state equilibrium.
Year of publication: |
2002-11
|
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Authors: | Duncan, Roberto |
Institutions: | Banco Central de Chile |
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