International Monetary Fund. Western Hemisphere Dept.
, capital wedge and bond wedge. Wedges are modeled as time-varying shocks and represent the combined effect of structural features such as market imperfections, institutional frameworks, and higher frequency events such as changes in global and local financial conditions, domestic policy decisions, etc.
5. In this paper we build-up on recent applications of the BCA methodology . This paper follows closely the paper by Lama (2011) , which finds that in episodes of output drop in Latin America during 1990-2006, the labor and efficiencywedges played a dominant role. A
Front Matter Page Western Hemisphere Department
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II. Analytical Framework
IV. Alternative Specification: Adjusting for Copper Investment
V. Conclusion and Policy Recommendations
1. Parameter Estimates for Benchmark Economy
2. Parameter Estimates for Alternative Economy
1. Benchmark Model-Measured Wedges
2. Benchmark Model-Output Data and EfficiencyWedge
3. Alternative Model-Measured Wedges
1. Simulation with EfficiencyWedge
2. Simulation with Efficiency and Government Wedges
3. Simulation with Efficiency, Goverment, and Investment Wedges
4a. Simulation with Borrowing Constraint
4b. Simulation with Borrowing Constraint
5. Simulating Policy Change
Reforms in India
1. China and India: GDP Growth Rate
2. Changes in GDP Components: 1990–2005
3. China: Growth Accounting
4. China and India: Labor Productivity
5. India: Growth Accounting
6. China: Simulation with EfficiencyWedge
7. China Simulation with Efficiency and Government Wedges
8. India: Simulation with Efficiency and Government Wedges
9. China: Derived Investment Wedge
10. India: Derived Investment Wedge
11. China: Simulation with Efficiency, Government and Investment Wedges
We investigate sources of economic fluctuations in Chile during 1998-2007 within the framework of a standard neoclassical growth model with time-varying frictions (wedges). We analyze the relative importance of efficiency, labor, investment, and government/trade wedges for business cycles in Chile. The purpose of this exercise is twofold: (i) focus the policy discussion on the most important wedges in the economy; and (ii) identify which broad class of models would present fruitful avenues for further research. We find that different wedges have played different roles during our studied period, but that the efficiency and labor wedges have had the greatest impact. We also compare our results with existing studies on Argentina, Brazil, and Mexico.
analyzing the sources of business cycle fluctuations. This methodology is useful for identifying, within a unified framework, the dominating frictions or shocks within the economy. The underlying model is a standard neoclassical growth model, in which a number of time-varying ‘wedges’ (each representing different types of distortions or shocks) are introduced. The wedges are a labor wedge, an investment wedge, an efficiencywedge, and an ‘income accounting’ wedge, capturing government spending and net exports (referred to as government wedge in Chari et al., 2006b
7. Efficiencywedge only economy. Dashed lines represent the series implied by the model. Solid lines represent the actual series.
8. Labor demand wedge only economy. Dashed lines represent the series implied by the model. Solid lines represent the actual series.
9. Labor supply wedge only economy. Dashed lines represent the series implied by the model. Solid lines represent the actual series.
10. U.S. GDP detrended in three different ways.
11. Components of the standard measure of hours worked.
12. Normalized series of hours worked (left
benchmark model. Figures A2.1 - A2.3 summarize our findings.
Clearly, the efficiencywedge plays a central role in explaining the fluctuations of investment and hours worked in Chile throughout the 1998-2007 period. However, the income accounting wedge best explains the behavior of consumption.
A ppendix 3. S ensitivity A nalysis
In this section, we report the results from our sensitivity analysis. We conduct two sets of experiements: one with respect to the deprication rate, δ , and the other with respect to the
use the algorithms that are a part of the open source MAT-LAB package DYNARE (See Adjemian and others (2011) ).
Given the estimated series of realized wages and estimated policy functions, I conduct experiments as in Chari, Kehoe, and McGrattan (2007) to evaluate the contribution of each wedge to fit the data. For example, to evaluate contribution of the TFP fluctuations, I consider the efficiency economy where all wedges are constant except the efficiencywedge. To calculate the model predictions for this economy, I feed innovations ɛ t = [ 0 , 0 , ɛ t e f
International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper for Chile describes the postcrisis recovery experience. The recovery from the 2008–2009 global crisis has been markedly different both among advanced and emerging economies. The steady improvement in the labor wedge-distortions related to the consumption leisure decision helped support the recovery. In Chile, the growth generated by this improvement, was sufficient to overcome the relatively weak performance of efficiency (TFP). Chile’s recovery has been characterized by strong investment growth, 0.8 percentage points higher than the precrisis trend. The establishment of the Financial Stability Council in 2011 is an important step to ensure close coordination among the institutions involved in Chile’s financial prudential framework.