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Exchange Rates in Chile. William R. Keech Carnegie Mellon University. Basics. Economic “Locus classicus” of inflation But hyperinflation only with Allende Currently “nil” Political Democracy 1932-1973 Dictatorship 1973-1990 Democracy 1990-present. 2 Episodes of rigid ER policy.

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exchange rates in chile

Exchange Rates in Chile

William R. Keech

Carnegie Mellon University

basics
Basics
  • Economic
    • “Locus classicus” of inflation
    • But hyperinflation only with Allende
    • Currently “nil”
  • Political
    • Democracy 1932-1973
    • Dictatorship 1973-1990
    • Democracy 1990-present
2 episodes of rigid er policy
2 Episodes of rigid ER policy
  • Last period of gold standard: 1925-1931
    • Hirschman: “misguided stubbornness”
  • ER fixed at 39 to US dollar 1979-1982
    • Dornbusch and Edwards: “monstrously incompetent”
crawling peg
Crawling Peg
  • First instituted under Frei 1965-1970
  • Rate announced by Central Bank
  • 3 exchange rates
    • Main rate for bulk of trade: forward bank rate
    • Rate for copper: spot bank rate
    • Tourism, etc: broker’s rate
  • Purpose: more stability in RER
unidad popular 1970 73
Unidad Popular: 1970-73
  • Focus on macroeconomic performance
    • 1971 vs 1972 and 1973
    • Massive public expenditure, debt, printing money
  • Multiple exchange rates
    • Lowest 3 percent of highest
    • Big devaluations, but still < inflation
crawling peg again 1974 79
Crawling peg again: 1974-79
  • Dictatorship reduced govt. role in economy
    • Eliminated ISI; promoted trade
  • But continued to control exchange rates
    • Reduced multiple rates to 3 and then 1
    • Devaluation then revaluations
    • Fluctuating RER
  • But inflation down to only mid 30s by 1979
fixed er 1979 1982
Fixed ER: 1979-1982
  • Inflation not falling
  • Fixed ER 6/1979 to reduce inflationary expectations
    • 39 peso to the US $
    • RER appreciated by a third
  • Inflation fell to 10% by 1982
  • But deep, deep recession
1982 1989
1982-1989
  • Abrupt devaluation
  • Free float for a time
  • Return to crawling peg
since the 1980s
Since the 1980s
  • Democracy bears fruits of market reforms
    • Keeping the neoliberal policies
    • Main economic change:
      • Orientation to distributional issues
      • Raising taxes to do it
  • Inflation fell to single digits, while maintaining growth
return to democracy cont
Return to democracy, cont.
  • Export success and inflow of capital
    • Led to appreciation in RER
  • CB dealt with this “problem” but nominal rate remained at bottom of band
  • 1992 revaluation and increase of band
lessons
Lessons
  • Too much credibility?
    • 1925-1932 and 1979-1982
    • But other (external) factors?
  • Crawling peg seems to have provided a good combination of discretion and commitment
  • Biggest lesson: get the fundamentals right
questions
Questions
  • Could Chile have gotten the fundamentals right under democratic institutions?
  • Could the dictatorship have done it faster and at less cost than it did?