Journal Economía Chilena (The Chilean Economy)

Articles
Monetary Policy Under Uncertainty and Learning: An Overview Klaus Schmidt-Hebbel D. / Carl E. Walsh. Central banks must make policy decisions in the face of uncertainty based on imperfect and evolving knowledge about the economy. While few general results have emerged from the research on monetary policy in the face of uncertainty and learning, a key lesson is that neither uncertainty nor learning can be ignored. This paper selectively reviews the literature on uncertainty and learning, specifically on the insights that are important for the conduct of monetary policy. Then it surveys the new research presented at the latest annual conference of the Central Bank of Chile, which uncovered recent theoretical results and empirical evidence for developed countries and the Chilean economy.
Learning, Endogenous Indexation, and Disinflation in the New-Keynesian Model Volker Wieland This paper introduces adaptive learning and endogenous indexation in the New-Keynesian Phillips curve and studies disinflation under inflation targeting policies. The analysis is motivated by the disinflation performance of many inflation-targeting countries, in particular the gradual Chilean disinflation with temporary annual targets. At the start of the disinflation episode, price-setting firms’ expect inflation to be highly persistent and opt for backward-looking indexation. As the central bank acts to bring inflation under control, price-setting firms revise their estimates of the degree of persistence. Such adaptive learning lowers the cost of disinflation. This reduction can be exploited by a gradual approach to disinflation. Firms that choose the rate for indexation also re-assess the likelihood that announced inflation targets determine steady-state inflation and adjust indexation of contracts accordingly. A strategy of announcing and pursuing short-term targets for inflation is found to influence the likelihood that firms switch from backward-looking indexation to the central bank’s targets. As firms abandon backwardlooking indexation the costs of disinflation decline further. We show that an inflation targeting strategy that employs temporary targets can benefit from lower disinflation costs due to the reduction in backward-looking indexation.
Sources of Uncertainty in Monetary Policy Conduct in Chile Felipe Morandé L. / Mauricio Tejada G. This paper analyzes the quantitative relevance of additive and multiplicative uncertainties, and in data for monetary policy conduct in Chile. The analysis on data uncertainty focuses on the uncertainty associated with output gap estimation using real-time data and several known methods for estimating trend output. We find that revisions to the output gap are important and persistent, and that the methods based on unobservable component are those that perform with real-time data with respect to the more common ones, such as the HP filter. For the cases of additive and multiplicative uncertainties, the equations that rule the economy’s behavior are estimated with time-varying parameters and with state-dependent variances in the model’s shocks. This allows analyzing the contribution of these two types of uncertainty to total uncertainty. We find that the additive uncertainty is the most relevant in explaining total uncertainty and that the model’s shocks are state dependent.
Overoptimism, Boom-Bust Cycles and Monetary Policy in Small Open Economies Manuel Marfán L. / Juan Pablo Medina G. / Claudio Soto G. This paper analyzes boom-bust cycles in emerging market economies triggered by miss-perception about future productivity. Using a small open economy DSGE model we show that non-materialized news about future productivity improvements (i.e. overoptimism) generate boombust cycles that replicate the stylized facts of several emerging economies during the 1990s. We report simulation results for a boom-bust cycle under alternative monetary policy rules. In this context, we show that if the central bank tries to stabilize output, there would be a large real appreciation of the currency and a deep contraction in the tradable goods sector. When the central bank follows a more strict inflation targeting regime, the boom-bust pattern in major aggregate variables would be exacerbated. Finally, if the central bank attempts to sustain the real exchange rate, the perverse effects on the domestic tradable goods sector are only prevented in the short-run, but the boom-bust cycle in other variables is amplified.
Research Notes
Traspaso de Tipo de Cambio a Precios: Una Aproximación Microeconómica Roberto Álvarez E. / Gustavo Leyva J. / Jorge Selaive C.
Inflación de Alimentos y Energía en una Muestra de Países David Moreno S. / Alfredo Pistelli M.
Books review
Macroeconomía: Teoría y Políticas de José De Gregorio Juan Andrés Fontaine T.
Current Account and External Financing de Kevin Cowan, Sebastián Edwards y Rodrigo O. Valdés (editores) Felipe Larraín B.
Publications Review
Catastro de publicaciones recientes y resúmenes de artículos seleccionados

Monetary Policy Under Uncertainty and Learning: An Overview
Klaus Schmidt-Hebbel D. / Carl E. Walsh.

Central banks must make policy decisions in the face of uncertainty based on imperfect and evolving knowledge about the economy. While few general results have emerged from the research on monetary policy in the face of uncertainty and learning, a key lesson is that neither uncertainty nor learning can be ignored. This paper selectively reviews the literature on uncertainty and learning, specifically on the insights that are important for the conduct of monetary policy. Then it surveys the new research presented at the latest annual conference of the Central Bank of Chile, which uncovered recent theoretical results and empirical evidence for developed countries and the Chilean economy.

Learning, Endogenous Indexation, and Disinflation in the New-Keynesian Model
Volker Wieland

This paper introduces adaptive learning and endogenous indexation in the New-Keynesian Phillips curve and studies disinflation under inflation targeting policies. The analysis is motivated by the disinflation performance of many inflation-targeting countries, in particular the gradual Chilean disinflation with temporary annual targets. At the start of the disinflation episode, price-setting firms’ expect inflation to be highly persistent and opt for backward-looking indexation. As the central bank acts to bring inflation under control, price-setting firms revise their estimates of the degree of persistence. Such adaptive learning lowers the cost of disinflation. This reduction can be exploited by a gradual approach to disinflation. Firms that choose the rate for indexation also re-assess the likelihood that announced inflation targets determine steady-state inflation and adjust indexation of contracts accordingly. A strategy of announcing and pursuing short-term targets for inflation is found to influence the likelihood that firms switch from backward-looking indexation to the central bank’s targets. As firms abandon backwardlooking indexation the costs of disinflation decline further. We show that an inflation targeting strategy that employs temporary targets can benefit from lower disinflation costs due to the reduction in backward-looking indexation.

Sources of Uncertainty in Monetary Policy Conduct in Chile
Felipe Morandé L. / Mauricio Tejada G.

This paper analyzes the quantitative relevance of additive and multiplicative uncertainties, and in data for monetary policy conduct in Chile. The analysis on data uncertainty focuses on the uncertainty associated with output gap estimation using real-time data and several known methods for estimating trend output. We find that revisions to the output gap are important and persistent, and that the methods based on unobservable component are those that perform with real-time data with respect to the more common ones, such as the HP filter. For the cases of additive and multiplicative uncertainties, the equations that rule the economy’s behavior are estimated with time-varying parameters and with state-dependent variances in the model’s shocks. This allows analyzing the contribution of these two types of uncertainty to total uncertainty. We find that the additive uncertainty is the most relevant in explaining total uncertainty and that the model’s shocks are state dependent.

Overoptimism, Boom-Bust Cycles and Monetary Policy in Small Open Economies
Manuel Marfán L. / Juan Pablo Medina G. / Claudio Soto G.

This paper analyzes boom-bust cycles in emerging market economies triggered by miss-perception about future productivity. Using a small open economy DSGE model we show that non-materialized news about future productivity improvements (i.e. overoptimism) generate boombust cycles that replicate the stylized facts of several emerging economies during the 1990s. We report simulation results for a boom-bust cycle under alternative monetary policy rules. In this context, we show that if the central bank tries to stabilize output, there would be a large real appreciation of the currency and a deep contraction in the tradable goods sector. When the central bank follows a more strict inflation targeting regime, the boom-bust pattern in major aggregate variables would be exacerbated. Finally, if the central bank attempts to sustain the real exchange rate, the perverse effects on the domestic tradable goods sector are only prevented in the short-run, but the boom-bust cycle in other variables is amplified.

Research Notes

Traspaso de Tipo de Cambio a Precios: Una Aproximación Microeconómica
Roberto Álvarez E. / Gustavo Leyva J. / Jorge Selaive C.

Inflación de Alimentos y Energía en una Muestra de Países
David Moreno S. / Alfredo Pistelli M.

Macroeconomía: Teoría y Políticas de José De Gregorio
Juan Andrés Fontaine T.

Current Account and External Financing de Kevin Cowan, Sebastián Edwards y Rodrigo O. Valdés (editores)
Felipe Larraín B.

Catastro de publicaciones recientes y resúmenes de artículos seleccionados

Banco Central de Chile

Revista Economía Chilena

Published Issues