DP14967 Comfort in Floating: Taking Stock of Twenty Years of Freely-Floating Exchange Rate in Chile

Author(s): Elias Albagli, Mauricio Calani, Metodij Hadzi-Vaskov, Mario Marcel, Luca Antonio Ricci
Publication Date: June 2020
Keyword(s): central bank independence, exchange rate pass-through, Exchange Rate Regime, FX derivatives, Hedging, Policy Credibility
JEL(s): E31, E52, F31, F33, F41, G15
Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14967

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).