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

Author: Elías Albagli, Mauricio Calani, Metodij Hadzi-Vaskov, Mario Marcel, and Mr. Luca A Ricci

Volume/Issue: Volume 2020 Issue 100

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Topics covered in this book

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Money and Monetary Policy , 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

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Summary

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).