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Exchange Rate Policy in Chile: From the Band to Floating and Beyond

  • Felipe Morandé
  • Matías Tapia

With the exemption of adopting a foreign currency, Chile has experienced virtually all the menu of options of exchange rate policies in the last 40 years. The quest for a reasonable exchange rate policy has been inspired in part by the different goals that, through time, policy makers have attempted to achieve with this policy. After almost of decade of co-existence of inflation targeting and an exchange rate band, in 1999 the Central Bank of Chile gave up the exchange rate band and replaced it with a policy of floating. This paper confronts two main questions: (a) Why was the band abandoned and, by the same token, why it took so long to do it and (b) How has the floating regime worked so far? This last question involves accounting for the possible appearance of “fear of floating” by the macroeconomic authorities, as well as evaluating the regime in three critical issues: exchange rate passthrough to domestic prices, exchange rate volatility and balance sheet effects. In the final section, the paper illustrates the operation of the exchange rate system in the face of regional contagion effects.

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Paper provided by University of Chile, Department of Economics in its series Working Papers with number wp192.

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Date of creation: Mar 2002
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Handle: RePEc:udc:wpaper:wp192
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  1. Jonathan David Ostry & Anne Marie Gulde & Atish R. Ghosh & Holger C. Wolf, 1995. "Does the Nominal Exchange Rate Regime Matter?," IMF Working Papers 95/121, International Monetary Fund.
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  10. Christian Broda, 2001. "Coping with Terms-of-Trade Shocks: Pegs versus Floats," American Economic Review, American Economic Association, vol. 91(2), pages 376-380, May.
  11. Leonardo Hernández & Peter Montiel, 2001. "Post-Crisis Exchange Rate Policy in Five Asian Countries: Filling in the “Hollow Middle”?," Department of Economics Working Papers 2001-05, Department of Economics, Williams College.
  12. Baxter, Marianne & Stockman, Alan C., 1989. "Business cycles and the exchange-rate regime : Some international evidence," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 377-400, May.
  13. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  14. Jeffrey A. Frankel and Shang-Jin Wei., 1993. "Emerging Currency Blocs," Center for International and Development Economics Research (CIDER) Working Papers C93-026, University of California at Berkeley.
  15. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  16. Felipe Morandé & Klaus Schmidt-Hebbel, 2000. "Chile's Peso: Better than (Just) Living with the Dollar?," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 37(110), pages 177-226.
  17. Bennett T. McCallum, 1999. "Theoretical Issues Pertaining to Monetary Unions," NBER Working Papers 7393, National Bureau of Economic Research, Inc.
  18. 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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