International Prices, Wages and Inflation in an Open Economy: A Chilean Model

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Abstract
A macro model which explains the dynamics of Chilean inflation is presented. The model extends the Australian and Scandinavian open-economy models by making a finer distinction between tradables and nontradables. Based on the results of the model, using quarterly Chilean data, the homogeneity of the system was rejected. The implication is that a devaluation does affect the relative price between tradables and nontradables in the Chilean context. Furthermore, the dynamics of prices and wages are such that the fixing of the exchange rate is bound to create a long period of peso appreciation.

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