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Overcoming Fear of Floating: Exchange Rate Policies in Chile

  • Jose De Gregorio
  • Andrea Tokman R.

The paper reviews the exchange rate management experience in Chile, with particular emphasis on the floating exchange rate regime and its two forex intervention episodes. It presents evidence on Chile’s favorable conditions to face 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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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 302.

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Date of creation: Dec 2004
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Handle: RePEc:chb:bcchwp:302
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  1. Hoyt Bleakley & Kevin Cowan, 2005. "Corporate Dollar Debt and Depreciations: Much Ado About Nothing?," Research Department Publications 4411, Inter-American Development Bank, Research Department.
  2. Amartya Lahiri & Carlos A. Végh, 2002. "Living with the Fear of Floating: An Optimal Policy Perspective," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 663-704 National Bureau of Economic Research, Inc.
  3. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
  4. 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.
  5. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
  6. Kevin Cowan & Erwin Hansen & Luis Oscar Herrera, 2005. "Currency Mismatches, Balance Sheet Effects and Hedging in Chilean non-Financial Corporations," Working Papers Central Bank of Chile 346, Central Bank of Chile.
  7. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
  8. Ramana Ramaswamy & Hossein Samiei, 2000. "The Yen-Dollar Rate; Have Interventions Mattered?," IMF Working Papers 00/95, International Monetary Fund.
  9. 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.
  10. Schmidt-Hebbel, Klaus & Tapia, Matias, 2002. "Inflation targeting in Chile," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 125-146, August.
  11. José de Gregorio, 2002. "Macroeconomic Management in Emerging Economies and The International Financial Architecture," Documentos de Trabajo 130, Centro de Economía Aplicada, Universidad de Chile.
  12. Eric Parrado & Andrés Velasco, 2002. "Alternative Monetary Rules in the Open Economy: A Welfare-Based Approach," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 7, pages 295-348 Central Bank of Chile.
  13. Ariel Burstein & Martin Eichenbaum & Sergio T. Rebelo, 2002. "Why Are Rates of Inflation So Low After Large Devaluations?," RCER Working Papers 486, University of Rochester - Center for Economic Research (RCER).
  14. Pablo E. Guidotti & Federico Sturzenegger & Agustín Villar, 2004. "On the Consequences of Sudden Stops," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  15. Esteban Jadresic & Jorge Selaive, 2005. "Is The FX Derivatives Market Effective and Efficient in Reducing Currency Risk?," Working Papers Central Bank of Chile 325, Central Bank of Chile.
  16. Ilan Goldfajn & Sergio R.C. Werlang, 2000. "The pass-through from depreciation to inflation : a panel study," Textos para discussão 423, Department of Economics PUC-Rio (Brazil).
  17. Jordi Galí & Tommaso Monacelli, 2003. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Working Papers 11, Barcelona Graduate School of Economics.
  18. Edwards, Sebastian, 2002. "The great exchange rate debate after Argentina," The North American Journal of Economics and Finance, Elsevier, vol. 13(3), pages 237-252, December.
  19. Matías Tapia & Andrea Tokman, 2004. "Effects of Foreign Exchange Intervention Under Public Information: the Chilean Case," Working Papers Central Bank of Chile 255, Central Bank of Chile.
  20. Stephen Chiu, 2002. "Signaling versus Commitment Strengthening: Exchange Rate Insurance against Currency Attacks," Working Papers 202002, Hong Kong Institute for Monetary Research.
  21. Enrique G. Mendoza & Guillermo A. Calvo, 2000. "Capital-Markets Crises and Economic Collapse in Emerging Markets: An Informational-Frictions Approach," American Economic Review, American Economic Association, vol. 90(2), pages 59-64, May.
  22. 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.
  23. M. S. Mohanty & Marc Klau, 2004. "Monetary policy rules in emerging market economies: issues and evidence," BIS Working Papers 149, Bank for International Settlements.
  24. Choudhri, Ehsan U. & Hakura, Dalia S., 2006. "Exchange rate pass-through to domestic prices: Does the inflationary environment matter?," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 614-639, June.
  25. John B. Taylor, 2001. "The Role of the Exchange Rate in Monetary-Policy Rules," American Economic Review, American Economic Association, vol. 91(2), pages 263-267, May.
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