Description

Using semi-structural VARs, this paper presents empirical evidence on the Chilean monetary policy operation. The singularity of this policy is that it works through targeting indexed interest rates, which are approximately equal to ex-post real rates. I identify changes in monetary policy as innovations in the central bank target rate. The evidence shows that monetary policy is effective in controlling output, but only partially effective in controlling inflation. In particular, the policy of indexed rates is able to affect the gap between current and target inflation, but not inflation per-se. This gives indirect evidence regarding the importance of the target inflation as the nominal anchor of the Chilean economy.