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Fear of Floating and Exchange Rate Policy in Chile

  • José De Gregorio R. /
  • Andrea Tokman R.

The paper reviews the exchange rate management experience in Chile, with particular emphasis on the floating exchange rate regime implemented in 1999 and its two forex intervention episodes. It presents evidence on Chile’s favorable conditions to deal with 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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File URL: http://www.bcentral.cl/estudios/revista-economia/2005/dic/Vol8N3dic2005pp29_54.pdf
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Article provided by Central Bank of Chile in its journal Economía Chilena.

Volume (Year): 8 (2005)
Issue (Month): 3 (December)
Pages: 29-54

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Handle: RePEc:chb:bcchec:v:8:y:2005:i:3:p:29-54
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  8. Dalia Hakura & Ehsan U. Choudhri, 2001. "Exchange Rate Pass-Through to Domestic Prices; Does the Inflationary Environment Matter?," IMF Working Papers 01/194, International Monetary Fund.
  9. Svensson, L.E.O., 1998. "Open-Economy Inflation Targeting," Papers 638, Stockholm - International Economic Studies.
  10. Christopher J. Neely, 2000. "The practice of central bank intervention: looking under the hood," Working Papers 2000-028, Federal Reserve Bank of St. Louis.
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  12. Hoyt Bleakley & Kevin Cowan, 2005. "Corporate Dollar Debt and Depreciations: Much Ado About Nothing?," Research Department Publications 4411, Inter-American Development Bank, Research Department.
  13. Obstfeld, Maurice & Rogoff, Kenneth, 1999. "New Directions for Stochastic Open Economy Models," Center for International and Development Economics Research, Working Paper Series qt5pf7g8sh, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
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  17. M. S. Mohanty & Marc Klau, 2004. "Monetary policy rules in emerging market economies: issues and evidence," BIS Working Papers 149, Bank for International Settlements.
  18. 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.
  19. Matías Tapia & Andrea Tokman, 2004. "Effects of Foreign Exchange Intervention under Public Information: The Chilean Case," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
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  21. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," Research Department Publications 4205, Inter-American Development Bank, Research Department.
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  24. Rasmus Fatum & Michael M. Hutchison, . "Is Foreign Exchange Market Intervention an Alternative to Monetary Policy? Evidence from Japan," EPRU Working Paper Series 02-11, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  25. Stephen Chiu, 2002. "Signaling versus Commitment Strengthening: Exchange Rate Insurance against Currency Attacks," Working Papers 202002, Hong Kong Institute for Monetary Research.
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