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Exchange Rate Policy in Chile: From the Band to Floating and Beyond

  • Felipe G. Morandé
  • Matías Tapia

As many countries worldwide, Chile has experienced virtually all the menu of options of exchange rate policies in the last 40 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, through this four decades, policy makers have attempted to achieve with this policy. After almost of decade of co-existence of inflation targeting and an exchange rate band, in 1999 the Central Bank of Chile gave up the exchange rate band and replaced it with a policy of floating. This paper confronts two main questions: (a) Why was the band abandoned and, by the same token, why it took so long to do it and (b) How has the floating regime worked so far? This last question involves accounting for the possible appearance of “fear of floating” by the 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. In the final section, the paper illustrates the operation of the exchange rate system in the face of regional contagion effects.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 152.

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Date of creation: Apr 2002
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Handle: RePEc:chb:bcchwp:152
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  1. George Allayannis & Jane Ihrig & James P. Weston, 2001. "Exchange-Rate Hedging: Financial versus Operational Strategies," American Economic Review, American Economic Association, vol. 91(2), pages 391-395, May.
  2. Francisco Gallego & Leonardo Hernández & Klaus Schmidt-Hebbel, 2002. "Capital Controls in Chile: Were They Effective?," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 12, pages 361-412 Central Bank of Chile.
  3. Rudi Dornbusch, 2001. "Fewer Monies, Better Monies," American Economic Review, American Economic Association, vol. 91(2), pages 238-242, May.
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  8. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  9. Buiter, Willem H., 2000. "Optimal Currency Areas: Why Does The Exchange Rate Regime Matter?," CEPR Discussion Papers 2366, C.E.P.R. Discussion Papers.
  10. David Hargreaves & C John McDermott, 1999. "Issues relating to optimal currency areas: theory and implications for New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 62, September.
  11. 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.
  12. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
  13. Jeffrey A. Frankel and Shang-Jin Wei., 1993. "Emerging Currency Blocs," Center for International and Development Economics Research (CIDER) Working Papers C93-026, University of California at Berkeley.
  14. Atish R. Ghosh & Anne-Marie Gulde & Jonathan D. Ostry & Holger C. Wolf, 1997. "Does the Nominal Exchange Rate Regime Matter?," NBER Working Papers 5874, National Bureau of Economic Research, Inc.
  15. Christian Broda, 2001. "Coping with Terms-of-Trade Shocks: Pegs versus Floats," American Economic Review, American Economic Association, vol. 91(2), pages 376-380, May.
  16. Baxter, Marianne & Stockman, Alan C., 1989. "Business cycles and the exchange-rate regime : Some international evidence," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 377-400, May.
  17. Todd E. Clark, 1996. "The responses of prices at different stages of production to monetary policy shocks," Research Working Paper 96-12, Federal Reserve Bank of Kansas City.
  18. Morande, Felipe G., 1986. "Domestic prices of importable goods in Chile and the law of one price 1975-1982," Journal of Development Economics, Elsevier, vol. 21(1), pages 131-147, April.
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