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Exchange Rates, Inflation and Disinflation: Latin American Experiences

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  • Sebastian Edwards

Abstract

This paper analyzes the relationship between exchange rates, inflation and disinflation in Latin America. The analysis concentrates on two central issues. First, the historical experience with fixed exchange rates in four Latin American countries is investigated. It is shown that even though these countries had the ability to undertake independent monetary policy, they chose to play by the "rules of the game". Until 1973, when the first oil shock took place, these countries strictly respected the constraints imposed by fixed exchange rates on their domestic credit policy. Between that date and the late 1980s, when the fixed rates were finally abandoned, they tried to ignore these constraints. This generated losses of reserves and increased inflation. The second issue addressed in the paper refers to the use of a nominal exchange rate anchor to reduce inflation. Data on Chile, Mexico and Venezuela are used to investigate the extent to which alternative exchange rate regimes affect inflationary inertia. It is found that fixing the exchange rate will not, on its own, reduce the degree of inertia.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4320.

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Date of creation: Apr 1993
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Publication status: published as Edwards, S. (ed.) Capital Controls, Exchange Rates and Monetary Policy in the World Economy. Cambridge University Press, 1995.
Handle: RePEc:nbr:nberwo:4320

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  1. Alan C. Stockman, 1993. "International Transmission under Bretton Woods," NBER Chapters, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 317-356 National Bureau of Economic Research, Inc.
  2. Robert P. Flood & Peter Isard, 1988. "Monetary Policy Strategies," NBER Working Papers 2770, National Bureau of Economic Research, Inc.
  3. Shantayanan Devarajan & Dani Rodrik, 1991. "Do the Benefits of Fixed Exchange Rates Outweigh Their Costs? The Franc Zone in Africa," NBER Working Papers 3727, National Bureau of Economic Research, Inc.
  4. Rudiger Dornbusch & Stanley Fischer, 1991. "Moderate Inflation," NBER Working Papers 3896, National Bureau of Economic Research, Inc.
  5. Bruno, M., 1991. "High Inflation and the Nominal Anchors of an Open Economy," Princeton Studies in International Economics 183, International Economics Section, Departement of Economics Princeton University,.
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Cited by:
  1. Steven B. Kamin, 1996. "Real exchange rates and inflation in exchange-rate based stabilizations: an empirical examination," International Finance Discussion Papers 554, Board of Governors of the Federal Reserve System (U.S.).
  2. Vittorio Corbo & Stanley Fischer, . "Structural Adjustment, Stabilization and Policy Reform: Domestic and International Finance," Documentos de Trabajo 170, Instituto de Economia. Pontificia Universidad Católica de Chile..
  3. Christophe RAULT & Guglielmo Maria CAPORALE & Thouraya HADJ AMOR, 2009. "International Financial Integration And Real Exchange Rate Long-Run Dynamics In Emerging Countries," William Davidson Institute Working Papers Series wp970, William Davidson Institute at the University of Michigan.
  4. Vittorio Corbo & Klaus Schmidt-Hebbel, 2001. "Inflation Targeting in Latin America," Working Papers Central Bank of Chile 105, Central Bank of Chile.
  5. Rogers, John H. & Wang, Ping, 1995. "Output, inflation, and stabilization in a small open economy: Evidence from Mexico," Journal of Development Economics, Elsevier, vol. 46(2), pages 271-293, April.
  6. Savvides, Andreas, 1998. "Inflation and monetary policy in selected West and Central African countries," World Development, Elsevier, vol. 26(5), pages 809-827, May.
  7. Guglielmo Maria Caporale & Thouraya Hadj Amor & Christophe Rault, 2009. "International Financial Integration and Real Exchange Rate Long-Run Dynamics in Emerging Countries: Some Panel Evidence," CESifo Working Paper Series 2819, CESifo Group Munich.
  8. Vittorio Corbo, . "Reducing Inflation. The Chilean Experience," Documentos de Trabajo 185, Instituto de Economia. Pontificia Universidad Católica de Chile..
  9. Yu Hsing, 2004. "Response of Venezuelan output to monetary policy, deficit spending, and currency depreciation: a VAR model," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO.
  10. Hsing, Y., 2004. "Responses of Argentine Output to Shocks to Monetary Policy, Fiscal Policy and Exchange Rates: A VAR Model," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 4(1).
  11. Vittorio Corbo, 1998. "Reaching One-Digit Inflation: The Chilean Experience," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 123-163, November.
  12. Erol, Turan & Van Wijnbergen, Sweder, 1997. "Real exchange rate targeting and inflation in Turkey: An empirical analysis with policy credibility," World Development, Elsevier, vol. 25(10), pages 1717-1730, October.
  13. Carlos Humberto Cardona & Adriana Pontón & Eduardo Sarmiento, . "Evidencia sobre las Desinflaciones: Experiencia Internacional," Borradores de Economia 102, Banco de la Republica de Colombia.

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