Mariana García-Schmidt and Javier García-Cicco

problems that arise naturally from a general equilibrium perspective. First, while the literature describes a single ERPT measure, in a general equilibrium model the evolution of the exchange rate and prices will differ depending on the shock hitting the economy. Accordingly, we distinguish between conditional and unconditional ERPT measures, showing that they can lead to very different interpretations of the likely dynamic of prices after a given change in the exchange rate. Second, in a general equilibrium model the ERPT crucially depends on the expected behavior of monetary policy, but the empirical approaches in the literature cannot account for this. Thus, using the empirical ERPT measures as a guide for monetary policy analysis is equivalent to believe that the actual behaviour of the exchange rate (and prices) will be independent from policy. Qualitatively, we use a simple model of small and open economy to show the intuition behind these two critiques. We also highlight the quantitative relevance of these distinctions by means of a DSGE model of a small and open economy with a sectoral decomposition, real and nominal rigidities, and a variety of driving forces; estimated using Chilean data.

Javier García-Cicco
Ph. D. en Economía (Duke University, USA). Investigador y profesor pro-titular de la Facultad de Cs. Económicas. Especialización en Macroeconomía, Economía Monetaria, Econometría.