Inflation Dynamics in a Small Open Economy Model Under Inflation Targeting: Some Evidence From Chile

The paper estimates a small open economy DSGE model, specified along the lines of Galí and Monacelli (REStud 2005) and Lubik and Schorfheide (JME 2007), on Chilean data for the full inflation targeting period (1999-2007). We study the specification of the policy rule followed by the Central Bank, the dynamic response of inflation to domestic and external shocks, and how these dynamics change under different policy parameters. We use the DSGE-VAR methodology (Del Negro and Schorfheide 2007) to assess the robustness of the conclusions to the presence of model misspecification.