Outside the Band: Depreciation and Inflation Dynamics in Chile

July 6, 2016

Preview Citation

Format: Chicago

. Esther Perez Ruiz Outside the Band: Depreciation and Inflation Dynamics in Chile, (USA: International Monetary Fund, 2016) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines inflation dynamics in Chile during the last peso depreciation episode 2013-15. The evidence is for substantial pass-through effects to inflation, given the large and persistent depreciation movement. Widespread indexation practices in non-traded goods markets are found to amplify the inflation response to the depreciation, while the role of wage indexation is less relevant to the inflation dynamics. Overall, inflation would have remained within the central bank’s target band absent the peso depreciation. The analysis also shows that tightening monetary policy in response to a depreciation shock can be costly in terms of output: the response of activity to rates is found to be strong, while the transmission from activity to inflation is found to be weak. Simulations under uncertainty about the extent of the pass-through also suggest that monetary policy can play a countercyclical role in the face of depreciation shocks at a moderate inflationary cost, as long as inflation expectations remain anchored.

Subject: Consumer price indexes, Depreciation, Import prices, Inflation, National accounts, Output gap, Prices, Production

Keywords: Chile, Consumer price indexes, Depreciation, Depreciation shock, Exchange rate pass-through, Global, Goods inflation, Import prices, Indexation, Inflation, Inflation dynamics, Inflation expectation, Inflation inertia, Monetary policy, Non-traded goods inflation, Output gap, Traded goods inflation, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/129
Stock No:

WPIEA2016129
ISBN:

9781498350976
ISSN:

1018-5941

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