Effects of Oil-Price Shocks on The Economies Of Chile and Its Trading Partners

Abstract

In order to assess the impact of an oil-price shock on the Chilean economy, this paper applies the sign constraint methodology of impulse-response functions to distinguish the effects of different types of shock, namely supply, demand, or specific demand for oil. To compare the results from Chile, the same exercise is performed for the country’s trading partners on aggregate, and the biggest four: China, the United States, the Eurozone and Japan. We find that in Chile, economic activity follows on the footsteps of the global economy: output drops when faced with a supply-side or oil-specific demand shock, and increases in response to a demand-side shock. Only in this latter case do prices increase importantly, but no significant effects are seen on the interest rate in none of the cases. The Chilean currency depreciates in response to a supply-side shock and, conversely, appreciates when the shock is related to demand. Generally, the results for Chile and its trading partners show no substantial differences.