Policy Shifts and External Shocks in Chile Under Rational Expectations

This paper develops a macroeconomic general-equilibrium model fully parameterized for the Chilean economy. The model's basic relations can be rigorously derived from intertemporal optimization by rational forward-looking agents. However, it also introduces critical real-world features - such as short-run wage rigidities and liquidity constraints - that generate deviations from the frictionless full-employment equilibrium of the unconstrained neoclassical paradigm. The model is numerically simulated to explore the effects of various permanent and temporary unanticipated policy shifts and foreign shocks. The experiments - a fiscal expansion, a monetary contraction, and adverse international oil price and interest rate shocks - reflect the policy changes and foreign shocks that Chile is likely to face at the turn of the millenium.