Description

This paper develops a macroecono mic general-equilibrium model fu lly parameterized for the Chilean economy. The model’s basic relations are derive d from intertemporal optimization by a group of rational forward-looking agents. The model also adds critical real-world features – such as short-run wage rigidities and a group of myopic agents – th at generate deviations from the frictionless full- employment equilibrium of the unconstrained ne oclassical paradigm. The model is numerically simulated to illustrate the dynamics of Chile’s economy in response to the external shocks and policy shifts that led to the 1998-99 recession.