| Abstract: |
With traditional domestic imbalances long under control, the
Chilean business cycle is driven by external shocks. Most importantly,
Chile’s external vulnerability is primarily a financial problem.
A decline in the Chilean terms of trade, for example, is associated
to a decline in real GDP that is many times larger than one would
predict in the presence of perfect financial markets. The financial
nature of this excess-sensitivity has two central dimensions: a
sharp contraction in Chile’s access to international financial
markets when it needs it the most; and an inefficient reallocation
of this scarce access across domestic borrowers during external
crises. In this paper I characterize this financial mechanism and
argue that Chile’s aggregate volatility can be reduced significantly
by fostering the private sector’s development of financial
instruments that are contingent on Chile’s main external
shocks. As a first step, the Central Bank or IFIs could issue a
benchmark instrument contingent on these shocks. I also advocate
a countercyclical monetary policy but mainly for incentive —that
is, as a substitute for taxes on capital inflows and equivalent
measures— rather than for ex-post liquidity purposes. |
Banco Central de Chile