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

  • Felipe Morandé L.
  • Matías Tapia G.

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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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. 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.
  2. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
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  7. Girton, Lance & Roper, Don, 1977. "A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience," American Economic Review, American Economic Association, vol. 67(4), pages 537-48, September.
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  9. 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.
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  14. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
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  16. Carlos José García & Jorge Enrique Restrepo, 2001. "Price Inflation and Exchange Rate Pass-Through in Chile," Working Papers Central Bank of Chile 128, Central Bank of Chile.
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  18. Joseph E. Gagnon & Jane Ihrig, 2001. "Monetary policy and exchange rate pass-through," International Finance Discussion Papers 704, Board of Governors of the Federal Reserve System (U.S.).
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