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This paper offers stochastic projections of the Central Bank of Chile’s balance sheet (stocks and flows), grounded on its present deficit situation. These projections incorporate the effect on the balance sheet of some macroeconomic variables and alternative policies, taking into consideration the economy’s inherent uncertainty and risks. It also describes and evaluates the main causes of the current deficit. In the baseline scenario, our deterministic projections show that the Central Bank’s capital will tend to grow and reach positive figures after twenty-five years. However, statistical projections indicate that this capital will continue in the red twenty-five years into the future with a 69% probability. On the other hand, a capital contribution of 7% of GDP would be necessary for senior liabilities not to surpass assets in ten years’ time, with a 95% probability. The likely evolution of capital is more favorable in the long run if the reserve hoarding growth rate is moderated, if minimum capital is established in real terms instead of nominal terms, and if accrued, unrealized, foreign exchange gains are not distributed.

The purpose of this paper is to obtain a set of estimates of the non-accelerating-inflation rate of unemployment (NAIRU) for Chile. Measuring the NAIRU permits building the unemployment gap, which is a complementary measure of activity and output gap, which is used on a regular basis by central banks as another indicator helping in inflation forecasts and policy decision making. Initially, an estimate is obtained based on a purely statistical method (unobserved components) Later, estimates are conducted for both constant and variable NAIRU based on Phillips curve equations. The different estimates yield similar results, indicating that the most likely point estimate for the current NAIRU stands between 7.4% and 8.3%. However, these figures are contained in a confidence interval ranging from 6.5% to 9.7%, reflecting great uncertainty regarding the exact value of NAIRU.

This paper documents the main empirical regularities of the Chilean economy over the past twenty years, characterizing it in two dimensions. First, it describes the economy’s structure in terms of the sectors’ relative sizes in the long term and the importance of the various components of aggregate demand. Second, it documents the main features of business cycles in Chile. The volatility and persistence of several variables across the cycles is described, together with the correlations within a set of significant variables. In general, the correlations observed tend to indicate that supply-side factors play an important role in explaining business cycles in Chile. On the aggregate demand side, terms of trade and availability of foreign capital are found to have substantial effects on all its different components.

We rank Chile in terms of labor market flexibility among a group that includes both OECD and emerging economies. We use a performance-based indicator of labor-market flexibility based on the half life of unemployment responses to macroeconomic shocks. This indicator captures the cyclical behavior of the labor market and is obtained by estimating a structural VAR (SVAR). The SVAR is identified using long-run restrictions, which are based on a simple open-economy model with labor-market rigidity. We found that Korea, Hong Kong, Chile, US, and Mexico are the most flexible economies. At the other end, our index indicates that Germany, Sweden, Spain and Colombia are the most rigid labor markets.