Figure 2 a shows that relative inflation rates exhibit a high persistence, which is corroborated by the 12-month moving average. This persistence seems, however, to decrease steadily beginning in 1990, which may be associated with the implementation of inflation targeting in Chile in 1990. In Figure 2 b shows the changes in the nominal exchange rate, which seems stationary. Nevertheless, the 12-month moving average exhibits some persistence around the mean. It also appears that appreciations and depreciations are more volatile since 2000, which might be related to the free-floating exchange rate regime that was implemented by the Central Bank of Chile in September 1999. Figure 2 c, shows that changes in the PPP gap behave as a persistent but mean-reverting process. The 12-month moving average exhibits persistence around the mean that seems higher since 2000. Figure 3 a,b show, respectively, the Chilean interest rate and its first difference. The latter exhibits a large decrease in volatility since 2000. This might be associated with two major reforms that were introduced in the Chilean financial market between 2000 and 2001. While the first reform, promulgated in 2000, gave greater protection to both domestic and foreign investors, the second reform, enacted in 2001, liberalized the financial system, implying, among other things, capital account deregulation. When the Chilean interest rate and its first difference are compared with their US counterparts, which are shown in Figure 3 c,d, an important difference in levels and volatility is noticeable. The Chilean interest rate has been historically higher than the US interest rate, and this seems to have changed since 2000. The latter is clearly reflected in the interest rate spread shown in Figure 3 e. The changes in the interest rate spread shown in Figure 3 f seem to mimic the changes in the Chilean interest rate volatility. Figure 4 a plots the copper price and the PPP gap. Two facts are noticeable. First, it seems that both variables are positively co-moving over time, suggesting that there is a negative relationship between copper prices and real exchange rates. Second, since 2005, the copper price has been higher than in the previous years, which might be associated with an increase in world copper demand. The decrease of in the copper price observed in 2008 was mainly caused by lower copper demand due to the international financial crisis. Figure 4 b shows that the copper price was more volatile at the
Econometrics 2017 , 5 , 29 9 of 21 beginning and end of the sample, and its 12-month moving average suggests some persistence around its mean. Figure 2. ( a ) Relative inflation rates (Chile/US); ( b ) Changes in nominal exchange rate (CLP/USD); ( c ) Change in the PPP gap. Monthly data 1986:1–2013:4. MAV is the 12-month moving average process.
Econometrics 2017 , 5 , 29 10 of 21 Figure 3. ( a ) Chilean interest rate; ( b ) Changes in Chilean interest rate; ( c ) US interest rate; ( d ) Changes in US interest rate; ( e ) Interest rate spread (Chile-US); ( f ) Changes in interest rate spread. Monthly data: 1986:1–2013:4.