CEPR A Concise History of Exchange Rate Regimes in Latin America
This paper analyzes exchange rate regimes implemented by the major Latin American countriessince the Second World War, with special attention to the period of the second globalization processbeginning in the 1970s. A central argument is that exchange rate policy has played a significant rolein shaping many of the macroeconomic outcomes observed during these decades. The choice of exchange rate regimes has decisive implications for the behavior of the nominalexchange rate (NER). This is a key macroeconomic variable that affects the behavior of relevantnominal and real variables, including the inflation rate, the balance of payments, output andemployment levels and the rate of economic growth. In this regard, the exchange rate regime canhave a decisive influence on four key economic policy objectives:a) Price stability b) Domestic financial stability and robustnessc) External and internal balancesd) Economic growth/development The choice of exchange rate regimes in Latin America has been influenced to a great extent by thehistorically specific degrees of freedom (or urgency) with which countries had addressed these policy objectives.During the 1950s and 1960s, the international monetary system followed the Bretton Woods rules, which established that countries had to maintain fixed exchange rates against the US dollar. Betweenthe late 1960s and the early 1970s, Latin American countries began to face a significantly differentinternational context: the gradual emergence of the second wave of financial globalization. Two key events in this process occurred during the first half of the 1970s. First, there was a shift in developedcountries from fixed to floating exchange rates, which strongly stimulated the development of foreign exchange markets and their derivatives. Second, OPEC countries generated the firstcoordinated rise in the price of oil. This shock rapidly caused large current account imbalances inoil-importing countries and at the same time supplied the incipient Eurodollar market with abundantliquidity. Since that period there has been secular growth in international capital flows concurrent with a progressive de-regulation of capital accounts and a progressive liberalization and opening of domestic financial systems. Both trends shaped the second wave of financial globalization. There were different responses to these changes in the international environment. Brazil kept itscrawling peg regime after the oil shock of 1973 and also its previous monetary policy. Its currentaccount deficit and foreign debt followed rising trends. During the first half of the 1970s, Argentina,Chile and Uruguay had suffered severe economic and political crises and persistently high inflationrates. The military coups that took power immediately afterwards tried to take advantage of theinternational financial conditions to introduce radical changes in the economic structures and fightinflation at the same time. They liberalized the domestic financial systems, reduced taxes on trade,tackled with different intensity fiscal imbalances and opened the capital account of the balance of payments. In the second half of the 1970s, all three countries oriented their exchange rate policiestowards stabilizing prices, adopting active crawling peg regimes.