Economic Growth and Inflation in Chile: 1958-1988

Abstract

The purpose of this paper is to apply a vector autoregressive (VAR) technique to study the dynamic relation between inflation and output growth in the Chilean economy during the period 1958-1988. The methodology follows closely previous work realized by Blanchard and Quah in decomposing observed shocks between supply (permanent) and demand (transitory) components. Two main conclusions arise from the study. First, demand shocks have a very short effect on output growth whereas supply shocks are characterized for a long lag structure. Second, demand shocks have a transitory effect on inflation while supply shocks have a quite persistent effect on this variable. Economic analysis of the 1958-1988 period can be enriched from the results of the paper. In particular, the traditional view regarding the 1975 and 1982 crises is challenged.