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Exchange Rate Policy in Chile: the Abandonment of the Band and the Floating Experience

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  • Felipe Morandé L.
  • Matías Tapia G.

Abstract

As many countries worldwide, Chile has experienced virtually all the menu of options of exchange rate policies in the last forty years—with the sole exception of giving up its national currency. The quest for a reasonable exchange rate policy has been inspired in part by the different goals that, throughout these four decades, policymakers have attempted to achieve with this policy. After almost a decade of inflation targeting coexisting with an exchange rate band, in 1999 the Central Bank of Chile gave up the band and replaced it with a policy of floating. This paper deals with two main questions: (a) Why was the band abandoned and, by the same token, why did it last so long? and (b) How has the floating regime worked so far? The latter question involves accounting for the possible appearance of “fear of floating” by macroeconomic authorities, as well as evaluating the regime in three issues highlighted by the critics of exchange rate floating: passthrough to domestic prices, exchange rate volatility and balance sheet effects.

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Bibliographic Info

Article provided by Central Bank of Chile in its journal Economía Chilena.

Volume (Year): 5 (2002)
Issue (Month): 3 (December)
Pages: 67-94

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Handle: RePEc:chb:bcchec:v:5:y:2002:i:3:p:67-94

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  1. Leonardo Hernández & Peter J. Montiel, 2002. "Post-crisis exchange rate policy in five Asian countries: filling in the "hollow middle"?," Pacific Basin Working Paper Series, Federal Reserve Bank of San Francisco 2002-07, Federal Reserve Bank of San Francisco.
  2. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
  3. Carlos José García & Jorge Enrique Restrepo, 2001. "Price Inflation and Exchange Rate Pass-Through in Chile," Working Papers Central Bank of Chile, Central Bank of Chile 128, Central Bank of Chile.
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  8. Jonathan David Ostry & Anne Marie Gulde & Atish R. Ghosh & Holger C. Wolf, 1995. "Does the Nominal Exchange Rate Regime Matter?," IMF Working Papers 95/121, International Monetary Fund.
  9. Leonardo Hernández & Peter Montiel, 2001. "Post-Crisis Exchange Rate Policy in Five Asian Countries," IMF Working Papers 01/170, International Monetary Fund.
  10. Todd E. Clark, 1999. "The Responses Of Prices At Different Stages Of Production To Monetary Policy Shocks," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 420-433, August.
  11. Ilan Goldfajn & Sergio R.C. Werlang, 2000. "The pass-through from depreciation to inflation : a panel study," Textos para discussão, Department of Economics PUC-Rio (Brazil) 423, Department of Economics PUC-Rio (Brazil).
  12. Kathryn M. E. Dominguez & Linda L. Tesar, 2001. "A Reexamination of Exchange-Rate Exposure," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 396-399, May.
  13. Felipe Morandé & Matías Tapia, 2002. "Exchange Rate Policy in Chile: From the Band to Floating and Beyond," Working Papers, University of Chile, Department of Economics wp192, University of Chile, Department of Economics.
  14. Joseph E. Gagnon & Jane Ihrig, 2001. "Monetary policy and exchange rate pass-through," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 704, Board of Governors of the Federal Reserve System (U.S.).
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  16. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 347-70, March.
  17. Felipe Morandé & Klaus Schmidt-Hebbel, 2000. "Chile's Peso: Better than (Just) Living with the Dollar?," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 37(110), pages 177-226.
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Cited by:
  1. Luis Felipe Céspedes & Ilan Goldfajn & Phil Lowe & Rodrigo Valdés, 2005. "Policy Responses to External Shocks: The Experiences of Australia, Brazil and Chile," Working Papers Central Bank of Chile, Central Bank of Chile 321, Central Bank of Chile.
  2. Luis Felipe Céspedes C. & Ilan Goldfajn & Phil Lowe & Rodrigo Valdés P., 2005. "Policy Responses to external Shocks in Australia, Brazil and Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, Central Bank of Chile, vol. 8(2), pages 7-44, August.

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