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The costs and benefits of fixed dollar exchange rates in Latin America

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  • John H. Welch
  • Darryl McLeod

Abstract

Chronic inflation and the importance of the exchange rate as a nominal anchor for the domestic price level have led some Latin American countries to consider returning to a fixed dollar exchange rate. John Welch and Darryl McLeod examine the costs and benefits of real exchange rate movements and their relevance for the credibility of inflation policies in countries now contemplating free trade agreements with the United States. ; The authors discuss the experiences of several Latin American countries and describe the problem their policy-makers face when deciding to follow either fixed or flexible exchange rate rules. Fixed exchange rates that are credible can decrease inflation rates, but only at the cost of policy flexibility in the face of adverse changes in the terms of trade or foreign interest rates. The current relative stability of international markets has led some Latin American countries to complement their stabilization and reform policies with fixed exchange rates.

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File URL: http://www.dallasfed.org/assets/documents/research/er/1993/er9301c.pdf
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Bibliographic Info

Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

Volume (Year): (1993)
Issue (Month): Jan ()
Pages: 31-44

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Handle: RePEc:fip:fedder:y:1993:i:jan:p:31-44

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Keywords: Foreign exchange - Law and legislation ; Latin America;

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  1. Maurice Obstfeld, 1991. "Destabilizing Effects of Exchange-Rate Escape Clauses," NBER Working Papers 3603, National Bureau of Economic Research, Inc.
  2. Carlos F. Diaz Alejandro, 1963. "A Note on the Impact of Devaluation and the Redistributive Effect," Journal of Political Economy, University of Chicago Press, vol. 71, pages 577.
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