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Overcoming Fear of Floating: Exchange Rate Policies in Chile

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  • Jose De Gregorio
  • Andrea Tokman R.

Abstract

The paper reviews the exchange rate management experience in Chile, with particular emphasis on the floating exchange rate regime and its two forex intervention episodes. It presents evidence on Chile’s favorable conditions to face exchange rate shocks: a well-developed financial sector, that offers hedging opportunities taken up by the corporate sector to decrease its vulnerability through balance sheet effects; and a low and decreasing level of passthrough from the exchange rate to prices. These elements contribute to diminish the costs of the floating exchange rate regime, reducing its implied financial and price instability threat, and therefore avoiding fear of floating. Moreover, it provides enough credibility to the current exchange rate system, reinforcing the commitment to making interventions a rare event.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 302.

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Date of creation: Dec 2004
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Handle: RePEc:chb:bcchwp:302

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References

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  1. Hoyt Bleakley & Kevin Cowan, 2002. "Corporate dollar debt and depreciations: much ado about nothing?," Working Papers 02-5, Federal Reserve Bank of Boston.
  2. Esteban Jadresic & Jorge Selaive, 2005. "Is The FX Derivatives Market Effective and Efficient in Reducing Currency Risk?," Working Papers Central Bank of Chile 325, Central Bank of Chile.
  3. Sebastian Edwards, 2002. "The Great Exchange Rate Debate After Argentina," NBER Working Papers 9257, National Bureau of Economic Research, Inc.
  4. Dalia Hakura & Ehsan U. Choudhri, 2001. "Exchange Rate Pass-Through to Domestic Prices," IMF Working Papers 01/194, International Monetary Fund.
  5. Sarno, Lucio & Taylor, Mark P, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective, and, If So, How Does It Work?," CEPR Discussion Papers 2690, C.E.P.R. Discussion Papers.
  6. Eric Parrado & Andrés Velasco, 2001. "Alternative Monetary Rules in the Open-Economy: a Welfare-Based Approach," Working Papers Central Bank of Chile 129, Central Bank of Chile.
  7. John B. Taylor, 2001. "The Role of the Exchange Rate in Monetary-Policy Rules," American Economic Review, American Economic Association, vol. 91(2), pages 263-267, May.
  8. Ilan Goldfajn & Sérgio Ribeiro da Costa Werlang, 2000. "The Pass-through from Depreciation to Inflation: A Panel Study," Working Papers Series 5, Central Bank of Brazil, Research Department.
  9. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
  10. Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers 1989, C.E.P.R. Discussion Papers.
  11. Amartya Lahiri & Carlos A. Végh, 2002. "Living with the Fear of Floating: An Optimal Policy Perspective," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 663-704 National Bureau of Economic Research, Inc.
  12. Matías Tapia & Andrea Tokman, 2004. "Effects of Foreign Exchange Intervention under Public Information: The Chilean Case," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  13. Ramana Ramaswamy & Hossein Samiei, 2000. "The Yen-Dollar Rate," IMF Working Papers 00/95, International Monetary Fund.
  14. Ariel Burstein & Martin Eichenbaum & Sergio T. Rebelo, 2002. "Why Are Rates of Inflation So Low After Large Devaluations?," RCER Working Papers 486, University of Rochester - Center for Economic Research (RCER).
  15. Enrique G. Mendoza & Guillermo A. Calvo, 2000. "Capital-Markets Crises and Economic Collapse in Emerging Markets: An Informational-Frictions Approach," American Economic Review, American Economic Association, vol. 90(2), pages 59-64, May.
  16. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, vol. 83(5), pages 1356-69, December.
  17. Jordi Galí & Tommaso Monacelli, 2003. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Working Papers 11, Barcelona Graduate School of Economics.
  18. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," IDB Publications 6467, Inter-American Development Bank.
  19. M. S. Mohanty & Marc Klau, 2004. "Monetary policy rules in emerging market economies: issues and evidence," BIS Working Papers 149, Bank for International Settlements.
  20. repec:fth:inadeb:418 is not listed on IDEAS
  21. Pablo E. Guidotti & Federico Sturzenegger & Agustín Villar, 2004. "On the Consequences of Sudden Stops," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  22. Kevin Cowan & Erwin Hansen & Luis Oscar Herrera, 2005. "Currency Mismatches, Balance-Sheet Effects and Hedging in Chilean Non-Financial Corporations," Research Department Publications 4387, Inter-American Development Bank, Research Department.
  23. Felipe G. Morandé & Matías Tapia, 2002. "Exchange Rate Policy in Chile: From the Band to Floating and Beyond," Working Papers Central Bank of Chile 152, Central Bank of Chile.
  24. Stephen Chiu, 2002. "Signaling versus Commitment Strengthening: Exchange Rate Insurance against Currency Attacks," Working Papers 202002, Hong Kong Institute for Monetary Research.
  25. Schmidt-Hebbel, Klaus & Tapia, Matias, 2002. "Inflation targeting in Chile," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 125-146, August.
  26. Jose De Gregorio, 2002. "Macroeconomic Management in Emerging Economies and the International Financial Architecture," Working Papers Central Bank of Chile 163, Central Bank of Chile.
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Citations

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Cited by:
  1. Jose De Gregorio, 2013. "Resilience in Latin America: Lessons from Macroeconomic Management and Financial Policies," IMF Working Papers 13/259, International Monetary Fund.
  2. Solimano, Andrés, 2007. "Employment creation, real wages and job quality : how much aggregate economic growth delivers? The case of Chile," ILO Working Papers 397932, International Labour Organization.
  3. José De Gregorio, 2008. "Price Stability and Financial Stability: Some Thoughts on the Current Global Financial Crisis," Economic Policy Papers Central Bank of Chile 28, Central Bank of Chile.
  4. Rodrigo Caputo & Gustavo Leyva & Michael Pedersen, 2014. "The Changing Nature of Real Exchange Rate Fluctuations. New Evidence for Inflation-Targeting Countries," Working Papers Central Bank of Chile 730, Central Bank of Chile.
  5. José De Gregorio & Andrea Tokman & Rodrigo Valdés, 2005. "Tipo de Cambio Flexible con Metas de Inflación en Chile: Experiencia y Temas de Interés," Economic Policy Papers Central Bank of Chile 14, Central Bank of Chile.
  6. Roberto Chang, 2008. "Inflation Targeting, Reserves Accumulation, and Exchange Rate Management in Latin America," BORRADORES DE ECONOMIA 004518, BANCO DE LA REPÚBLICA.
  7. Kevin Cowan & Jose De Gregorio, 2005. "International Borrowing, Capital Controls and the Exchange Rate: Lessons from Chile," NBER Working Papers 11382, National Bureau of Economic Research, Inc.
  8. Jorge Enrique Restrepo & Andrea Tokman, 2004. "Labor Markets and Institutions: An Overview," Working Papers Central Bank of Chile 304, Central Bank of Chile.
  9. José De Gregorio & Andrea Tokman R., 2004. "Flexible Exchange Rate Regime and Forex Interventions: The Chilean Case," Economic Policy Papers Central Bank of Chile 11, Central Bank of Chile.

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