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The Behavior of Interest Rates and Real Exchange Rates During a Liberalization Episode: The Case of Chile 1973-83

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  • Sebastian Edwards

Abstract

This paper analyzes the behavior of some key variables during the recent economic liberalization reform attempted in Chile. The paper concentrates on the behavior of the real exchange rate and nominal and real interest rates during the period 1977-83. It is argued that as a consequence of the liberalization of the capital account in Chile in 1979-81, dramatic inflows of financial capital resulted. These capital inflows generated an important increase in expenditure, and a lower relative price of tradables to nontradables or real appreciation. Moreover, it is argued that it is the liberalization of the capital account, and not the adoption of a preannounced rate of devaluation, that generated the dramatic real appreciation of the Chilean currency between 1979 and 1981 . A model to analyze interest rate behavior in a semi-open economy is also presented and applied to the case of Chile. The results obtained suggest that during this period interest rates responded both to open-economy and closed-economy factors. Among the former the increase in the expected rate of devaluation was particularly important.

Suggested Citation

  • Sebastian Edwards, 1985. "The Behavior of Interest Rates and Real Exchange Rates During a Liberalization Episode: The Case of Chile 1973-83," NBER Working Papers 1702, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1702
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    Cited by:

    1. Elbadawi, Ibrahim A. & Soto, Raimundo, 1994. "Capital flows and long-term equilibrium real exchange rates in Chile," Policy Research Working Paper Series 1306, The World Bank.
    2. repec:hal:wpspec:info:hdl:2441/53r60a8s3kup1vc9l5643ehjk is not listed on IDEAS
    3. Jesus Felipe, 2009. "Does Pakistan Need To Adopt Inflation Targeting? Some Questions," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 5, pages 113-162.
    4. Diehl, Markus & Schweickert, Rainer, 1998. "Currency crises: Is Asia different?," Kiel Discussion Papers 309, Kiel Institute for the World Economy (IfW Kiel).
    5. repec:spo:wpecon:info:hdl:2441/53r60a8s3kup1vc9l5643ehjk is not listed on IDEAS
    6. Shah Hussain, 2008. "Sources of Real Exchange Rate Misalignment Evidence from Pakistan," SBP Working Paper Series 26, State Bank of Pakistan, Research Department.

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