How Sensitive is Volatility to Exchange Rate Regimes?
It is usually conjectured that the nominal exchange rate should be more volatile under a free float than under a dirty float regime. This paper examines this issue for the Chilean economy. Specifically, in September 1999 the Central Bank of Chile eliminated the floating band for the nominal exchange rate, which operated since 1984, and established a free float. This lasted until the burst of the last Argentinean economic crisis in July 2001. Since then, the Central Bank has smoothed out the exchange rate path by selling US dollars and/or issuing US dollar-denominated bonds. We examine the free float period by assessing whether the increase in exchange rate volatility was as sharp as expected. We show that volatility went up, but only slightly.
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