Abstract

This paper provides a framework for analyzing the growth dynamics of Chile. Using univariate time series representations, we find that the Chilean data is more consistent with exogenous rather than endogenous growth models. Terms of trade, improvements in the quality of capital, and the presence of distortions are important factors behind a dynamic characterization of the behavior of TFP and GDP. We show that distortions not only eliminate the positive effects of improvements in the quality of capital, but also precede technology shocks and increase their volatility. A dynamic stochastic general equilibrium model, that explicitly incorporates the theoretical counterpart of capital stock quality, distortionary taxes and terms of trade, can successfully replicate the impulse-response functions found in the data. This exercise suggests that distortions play a key role in explaining the dynamics of growth in Chile. © 2005 Elsevier B.V. All rights reserved.