1. Exchange Rates in Chile William R. Keech Carnegie Mellon University

2. Basics Economic –“Locus classicus” of inflation –But hyperinflation only with Allende –Currently “nil” Political –Democracy 1932-1973 –Dictatorship 1973-1990 –Democracy 1990-present

3. 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”

4. 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

5. 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

6. 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

7. 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

8. 1982-1989 Abrupt devaluation Free float for a time Return to crawling peg

9. 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

10. 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

11. 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

12. 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?