Job market paper

South American economies are deeply exposed to world commodity prices; shocks pass quickly to producer costs and the exchange rate, while most central banks target CPI under heterogeneous FX regimes. This raises a design question: which monetary framework best stabilizes inflation and activity in commodity exporters?. This paper investigates the question by (i) estimating a SVAR to gauge the roles of global commodity and external financial shocks in regional inflation and policy rates, and (ii) building and estimating (on Chile) a New Keynesian small open- economy model with a commodity-exporting sector. I compare CPI targeting, PPI targeting, and a PPI+exchange-rate-smoothing rule. Empirically, commodity shocks dominate price dynamics; PPI responds far more than CPI, and policy rates react weakly. In the model, strict PPI stabilizes inflation better than CPI but raises output and rate volatility; the hybrid rule breaks this trade-off, anchoring prices while damping imported volatility. Moreover, welfare favors the hybrid regime: gains up to 1.6% of steady-state consumption versus CPI targeting (about 0.8% versus strict PPI).