Empirical Puzzles of Chilean Stabilization Policy

This paper reviews Chilean stabilization policy during the 1990s andargues that, while the merits of Chilean policy should be praised, there are fourpuzzles in conventional interpretations of the Chilean experience worth studying.First, the policy of targeting indexed interest rates does not coincide with a policyof targeting real interest rates. Second, there is no systematic link between thedecline in inflation and the upward adjustments in indexed interest rates. Third,changes in the exchange rate and in the performance of the external sector helpexplain the decline in inflation. Fourth, the strong cyclical growth of the realeconomy was influenced in part by the large and persistent increase in the worldprice of Copper. We provide statistical evidence favoring these arguments usingrecursively-identified vector-autoregression models, and sketch a model ofstaggered pricing under indexation that sheds some light on the Chilean case.