The Implementation of Monetary Policy in an Emerging Economy: The Case of Chile

Central bank authorities base implementation of monetary policy on an analysis of multiple variables known as monetary policy indicators. In a small open economy such as Chile, these indicators may include inflation misalignments, unemployment, GDP growth, money growth, the current account balance, exchange rate volatility and international reserves. A neural network approach is used to establish the corresponding weights considered by the Board of the Central Bank of Chile during the period 1995-2003. GDP growth and the difference between the actual and the target inflation were found to be among the variables of greatest weight in the monetary policy decision-making process of the Central Bank of Chile during this period.