Equilibrium Real Exchange Rate in Chile: Alternative Approaches

Rodrigo Caputo and Marco Núñez N

Journal Economía Chilena (The Chilean Economy), 2008, vol. 11, issue 2, 59-77

Abstract: In the monetary policy framework based on inflation targeting and a floating exchange rate, it is necessary to know the equilibrium real exchange rate (RER). This paper describes models for determining the equilibrium RER of regular use at the CBC. In particular, the purchasing power parity, macroeconomic balance, and reduced-form models are discussed. We show how these paradigms are used complementarily to report the judgment of economic policymakers. We also discuss the way in which the structural surplus rule in place, under which the state saves a large part of copper income, has tended to attenuate the previous relationship between the RER and the terms of trade. This change leads to revising the ways of implementing the reduced-form models. Specifically, we suggest that, within the current fiscal policy framework, one of the fundamentals of the RER are the non-copper terms of trade rather than the aggregate terms of trade.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchec:v:11:y:2008:i:2:p:59-77

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