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Exchange Rates, Inflation and Disinflation: Latin American Experiences

  • Sebastian Edwards

This paper analyzes the relationship between exchange rates, inflation and disinflation in Latin America. The analysis concentrates on two central issues. First, the historical experience with fixed exchange rates in four Latin American countries is investigated. It is shown that even though these countries had the ability to undertake independent monetary policy, they chose to play by the "rules of the game". Until 1973, when the first oil shock took place, these countries strictly respected the constraints imposed by fixed exchange rates on their domestic credit policy. Between that date and the late 1980s, when the fixed rates were finally abandoned, they tried to ignore these constraints. This generated losses of reserves and increased inflation. The second issue addressed in the paper refers to the use of a nominal exchange rate anchor to reduce inflation. Data on Chile, Mexico and Venezuela are used to investigate the extent to which alternative exchange rate regimes affect inflationary inertia. It is found that fixing the exchange rate will not, on its own, reduce the degree of inertia.

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File URL: http://www.nber.org/papers/w4320.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4320.

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Date of creation: Apr 1993
Date of revision:
Publication status: published as Edwards, S. (ed.) Capital Controls, Exchange Rates and Monetary Policy in the World Economy. Cambridge University Press, 1995.
Handle: RePEc:nbr:nberwo:4320
Note: IFM
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Web page: http://www.nber.org
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  1. Devarajan, Shantayanan & Rodrik, Dani, 1991. "Do the benefits of fixed exchange rates outweigh their costs? The Franc Zone in Africa," Policy Research Working Paper Series 777, The World Bank.
  2. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-55, June.
  3. Dornbusch, Rudiger & Fischer, Stanley, 1993. "Moderate Inflation," World Bank Economic Review, World Bank Group, vol. 7(1), pages 1-44, January.
  4. Alan C. Stockman, 1992. "International Transmission Under Bretton Woods," NBER Working Papers 4127, National Bureau of Economic Research, Inc.
  5. Bruno, M., 1991. "High Inflation and the Nominal Anchors of an Open Economy," Princeton Studies in International Economics 183, International Economics Section, Departement of Economics Princeton University,.
  6. Robert P. Flood & Peter Isard, 1988. "Monetary Policy Strategies," NBER Working Papers 2770, National Bureau of Economic Research, Inc.
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