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Fear of Floating and Exchange Rate Policy in Chile

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

Abstract

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.

Suggested Citation

  • José De Gregorio R. / & Andrea Tokman R., 2005. "Fear of Floating and Exchange Rate Policy in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 8(3), pages 29-54, December.
    • Handle: RePEc:chb:bcchec:v:8:y:2005:i:3:p:29-54
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    References listed on IDEAS

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    Cited by:

    1. José De Gregorio & Felipe Labbé, 2011. "Copper, the Real Exchange Rate and Macroeconomic Fluctuations in Chile," Working Papers Central Bank of Chile 640, Central Bank of Chile.

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