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Leandro Medina and Mr. Nicolas E Magud
This paper estimates the potential output (and the output gap) in Chile using several different methodologies. After a structural brake in 1998, the average growth rate of potential output in Chile declined from over 7 percent to 3-4 percent in the aggregate economy, but to less than 2 percent in the natural resource sector. The contributions to aggregate potential output growth of the natural resource sector and the non-natural resource sector are estimated, finding that the contribution to growth of the natural resource sector is non-linear-increasing during the 1990s, declining during the 2000s, and turning negative in the mid-2000s-despite the monotonic decrease in the share of natural resource output in aggregate output.
Leandro Medina and Mr. Nicolas E Magud

resource GDP, the rate of growth declined from 6–7 percent before 1998 down to less than 2 percent after the structural brake. Thus, potential GDP growth substantially declined after 1998 for each sector, with a much larger decline in the natural resource sector. We also find that as of Q2–2010 (the latest observation in our sample) the output gap in Chile is nearly closed, regardless of the real GDP measure. The natural resource sector seems to be already producing above potential. Finally, we analyze the contributions to potential output growth of the natural

Pierre-Richard Agénor and Mr. Willy A Hoffmaister
This paper examines the short-run links between money growth, exchange rate depreciation, nominal wage growth, the output gap, and inflation in Chile, Korea, Mexico, and Turkey, using a generalized vector autoregression analysis. Nominal historical wage shocks are shown to have an important effect on movements in inflation only in Mexico. Generalized impulse response functions show that a positive historical shock to nominal wage growth generates a transitory but significant reduction in output. Inflation increases in all countries, particularly Mexico. A positive shock to nominal money growth raises real cash balances on impact and exerts an expansionary effect on output, despite an increase in real wages.
Pierre-Richard Agénor and Mr. Willy A Hoffmaister

estimation period in these countries. Note that, with the exception of Chile, historical shocks associated with inflation do not appear to be an important factor behind movements in the output gap. In Chile, these shocks explain about 10 percent of the movements in the deviations of output from trend at a forecast horizon of two years. Historical shocks to the nominal money growth rate have a significant impact only in Korea. 20 V. GENERALIZED IMPULSE RESPONSES We now turn to an analysis of GIRs associated with the following shocks: wage growth, money growth, and

International Monetary Fund

macroeconomic policies in the current juncture and the risks from the global financial deleveraging and economic contraction . Reforms to solidify the policy framework, the financial system, and capital markets . Box 2: The Global Crisis and Potential Output in Chile The global crisis has negatively affected copper prices, as well as investment and export prospects . These factors have been viewed as important for the determination of potential growth, and in consequence, for estimating the output gap in Chile. The output gap was estimated using a structural

International Monetary Fund
This 2009 Article IV Consultation highlights that the Chilean economy has proved resilient in the face of the global financial crisis. The policy response to the crisis has been sizable, well balanced, and coordinated. Executive Directors have commended the Chilean authorities for their sound policy framework underpinned by an inflation target regime, a structural budget rule, and a flexible exchange rate regime. Directors have also endorsed the Central Bank of Chile’s decision to implement alternative means of monetary easing to support activity and a return of inflation to the target.