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Comfort in Floating: Taking Stock of Twenty Years of Freely-Floating Exchange Rate in Chile

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  • Elías Albagli
  • Mauricio Calani
  • Metodij Hadzi-Vaskov
  • Mario Marcel
  • Mr. Luca A Ricci

Abstract

Chile offers an example of a country that has overcome the fear of floating by reducing balance sheet mismatches, enhancing financial market development, as well as improving monetary, fiscal, and political institutions, and strengthening policy credibility. Under the floating regime, Chile’s economic adjustment to external shocks appears significantly improved, and its exchange rate pass-through has substantially declined. Our results reinforce the case that moving to a clear and credible floating regime can be associated with a reduction in the fear of floating via economic transformation (like smaller balance sheet mismatches, a larger hedging market, and a lower exchange rate pass-through).

Suggested Citation

  • Elías Albagli & Mauricio Calani & Metodij Hadzi-Vaskov & Mario Marcel & Mr. Luca A Ricci, 2020. "Comfort in Floating: Taking Stock of Twenty Years of Freely-Floating Exchange Rate in Chile," IMF Working Papers 2020/100, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2020/100
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    1. Laura Alfaro & Mauricio Calani & Liliana Varela, 2021. "Granular Corporate Hedging Under Dominant Currency," NBER Working Papers 28910, National Bureau of Economic Research, Inc.
    2. International Monetary Fund, 2021. "Chile: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Chile," IMF Staff Country Reports 2021/083, International Monetary Fund.
    3. Carlos Madeira, 2023. "The evolution of macroprudential policy use in Chile, Latin America and the OECD," Journal of Banking Regulation, Palgrave Macmillan, vol. 24(3), pages 357-380, September.
    4. Metodij Hadzi-Vaskov & Mr. Luca A Ricci, 2021. "Understanding Chile’s Social Unrest in an International Perspective," IMF Working Papers 2021/174, International Monetary Fund.
    5. Mr. Balazs Csonto & Tryggvi Gudmundsson, 2020. "Destabilizing Stability? Exchange Rate Arrangements and Foreign Currency Debt," IMF Working Papers 2020/173, International Monetary Fund.

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    More about this item

    Keywords

    WP; firm; FX exposure; balance sheet; nominal exchange rate; currency mismatch; currency exposure; monetary policy; crisis episode; FX derivative; Chilean peso; financial crisis; interest rate; foreign currency; balance sheet mismatch; central bank; Exchange rates; Financial statements; Currencies; Exchange rate arrangements; Global; exchange rate regime; FX derivatives; hedging; exchange rate pass-through; policy credibility; central bank independence; derivative contract;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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