Chile's Peso: Better Than (Just) Living with the Dollar?
AbstractThe choice between maintaining or giving up the national currency is determined by putting on balance the benefits of macroeconomic flexibility derived from a floating exchange rate and an independent monetary policy, and the microeconomic benefits derived from joining a currency union or adopting unilaterally a foreign currency. This paper assesses this choice for Chile. The country’s financial development and macroeconomic stability imply low microeconomic and efficiency costs in sticking to the peso. An evaluation of optimal currency-area criteria shows that Chile is not a natural candidate for joining a monetary union with prospective partners in Latin America, NAFTA, or the European Union. Unilateral dollarization is even less beneficial. Among Southern Hemisphere countries with various exchange rate regimes, Chile would gain the least from giving up its national currency. For a country like Chile, subject to large idiosyncratic shocks and significant temporary price and wage rigidity, a flexible exchange rate and an independent monetary policy anchored to an inflation target comprise the dominant regime choice.
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Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 68.
Date of creation: Mar 2000
Date of revision:
Other versions of this item:
- 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., vol. 37(110), pages 177-226.
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-02-10 (All new papers)
- NEP-IFN-2002-02-15 (International Finance)
- NEP-LAM-2002-02-15 (Central & South America)
- NEP-PKE-2002-02-15 (Post Keynesian Economics)
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