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Chile's Peso: Better Than (Just) Living with the Dollar?

  • Felipe Morandé
  • Klaus Schmidt-Hebbel

The choice between maintaining or giving up the national currency is determined by putting on balance the benefits of macroeconomic flexibility derived from a floating exchange rate and an independent monetary policy, and the microeconomic benefits derived from joining a currency union or adopting unilaterally a foreign currency. This paper assesses this choice for Chile. The country’s financial development and macroeconomic stability imply low microeconomic and efficiency costs in sticking to the peso. An evaluation of optimal currency-area criteria shows that Chile is not a natural candidate for joining a monetary union with prospective partners in Latin America, NAFTA, or the European Union. Unilateral dollarization is even less beneficial. Among Southern Hemisphere countries with various exchange rate regimes, Chile would gain the least from giving up its national currency. For a country like Chile, subject to large idiosyncratic shocks and significant temporary price and wage rigidity, a flexible exchange rate and an independent monetary policy anchored to an inflation target comprise the dominant regime choice.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 68.

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Date of creation: Mar 2000
Date of revision:
Handle: RePEc:chb:bcchwp:68
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  1. Shang-Jin Wei, 1996. "Intra-National versus International Trade: How Stubborn are Nations in Global Integration?," NBER Working Papers 5531, National Bureau of Economic Research, Inc.
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  8. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
  9. Emerson, Michael & Gros, Daniel & Italianer, Alexander & ,, 1992. "One Market, One Money: An Evaluation of the Potential Benefits and Costs of Forming an Economic and Monetary Union," OUP Catalogue, Oxford University Press, number 9780198773245.
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  11. Olivier Jeanne & Andrew K Rose, 1999. "Noise trading and exchange rate regimes," Reserve Bank of New Zealand Discussion Paper Series G99/2, Reserve Bank of New Zealand.
  12. Mahadeva, Lavan & Gabriel Sterne, 2002. "Inflation Targets as a Stabilisation Device," Royal Economic Society Annual Conference 2002 134, Royal Economic Society.
  13. 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.
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