General Equilibrium Dynamics of External Shocks and Policy Changes in Chile

This paper develops a macroeconomic general-equilibrium model fully parameterized for the Chilean economy. The model’s basic relations are derived 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 – that generate deviations from the frictionless fullemployment equilibrium of the unconstrained neoclassical 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.