HE

EPRECI
TION
F THE
HILEAN
ESO
Tomás
rte & Javiera
orano
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 Abstract

This paper offers an understanding on the recent devaluation of the Chilean Peso,

seeking out the factors for which investors find attractive to invest on the Chilean market. The

research done here gives a brief analysis about the history of the Chilean peso, the Chilean

economy, the factors which cause its fluctuation, and finally, an assumption on how the peso

might fluctuate in the future and the factors behind that reasoning. Throughout the course

we’ve been shown multiple tools, for which we hope to integrate them on the research for our

topic.

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 A Brief History on the Chilean

Peso
Simultaneously with the independence of Chile, the Peso was established the year 1817

as a replacement of the Colonial Real and as the currency of the New Homeland, though the

Spanish monetary system persisted until 1851, where the Colonial Real was completely

abolished and the decimal peso system started to gain control.

The Peso was fabricated by the Casa de la Moneda, established in 1743, and its

circulation controlled by the Banco Central de Chile, established in 1925. Because of the

inflation in 1955, the decimal system of the Peso was disposed, meaning that all fractions of the

currency, such as cents, were to be eliminated. 4 years later, the Escudo replaced the Peso.

Initially, it was established to improve the economy of the country during the mandate of Jorge

Alessandri. However, in 1975, the Chilean currency would have a new replacement with the

second entry into force of the known peso. This happened under the dictatorship of Augusto

Pinochet and by the act 1123, published on the 4th of August, the Peso regained its power as

the official currency of Chile starting the 29 of September of that same year, with a rate of 1

Peso per 1000 escudos.

Being mentioned as the most affected country by the Great Depression, Chile started to

receive help from the CEPAL and the Keynesian influence, as well as my other South American

countries. These influences brought in the mid of 1960’s, with them the Great Inflation, which

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lasted 2 decade, since 1960’s economists ignored the idea of stagflation (when there is

unemployment and high interest rates), because of the ideas given with the Phillips Curve that

both interest rates and unemployment purely have an inverse relationship. Also, during the

time of the presidency of Salvador Allende (1970-1973), many economical changes were made.

This provoked the deep economic crisis which was prolonged until 1975. During this year the

Chilean Peso was crawling in a floating band until 1979, being pegged to a fixed rate of 39 Pesos

per 1 USD. The economic started to create pressure on the fixed interest rate of the Peso.

During this era, many financial institutions were intervened and liquidated by the State due to

their excessive risk activities, denominated as the bank crisis. Also, during this time, the

external debt of Chile rose from U$3.5 bn to U$17 bn. Due to these pressures, the interest rate

couldn’t hold it any longer as a fixed rate so, in 1982, the Peso started to devalue, reaching in

1984 a rate of 100 Pesos per USD. Finally, being let to crawl again at within a floating band in

1984.

We must understand the meaning of the inflationary problems and what causes it.

Inflation is the generalized and sustained increase in the prices of goods and services in a

country during a sustained period of time, sometimes caused by an abnormal amount of

consumption by the consumers, which was reflected during 1977-1982, where the majority of

the spending in Chile consisted in the consumption of goods and services. When these prices

rise, with each unit currency less goods and services are acquired. As we can see the inflation

reflects the diminution of the purchasing power of the currency. We can measure the growth of

inflation with indexes, reflecting the percentage growth of a weighted “basket of goods”. The

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index of inflation measurement is the Consumer Price Index or CPI. The causes of inflation can

be, when demand outstrips supply, forcing the increase in prices and wages.

The graph shows the fluctuations of the Rate of Growth of GDP of Chile compared to South

America. It is visible to observe the massive downfall of the growth of the Chilean GDP, reaching

critical numbers from 1973 until 1983.

Since 1999, the Chilean peso started to float freely against the USD. The only entity to

intervene with the Peso was the Banco Central de Chile, as a countermeasure to excessive

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depreciation. The intervention was made under two occasions, in 2001 with the Argentinian

crisis and the 9/11 attacks, and in 2002 during the Brazilian presidential elections.

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These are examples of Escudos, early Pesos and cents. The period between 1971-1973 had

inflationary problems, for which denominations of banknotes grew, so they appeared in

circulation the notes of 500, 1000, 5000 and 10.000. Escudos began their withdrawal from

circulation and beginning totally replaced in 1979 by the current Chilean peso.

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 The Chilean Economy and the

Peso Devaluation
With a nominal GDP of 298.172 billion dollars in 2018, Chile is considered as a leading

nation in Latin America, in competitiveness, economic freedom, low corruption perception and

globalization. The Chilean economy is seen as one of the most stables and prosperous in South

America, over passing its neighbor countries in the inequality-adjusted human development

index, with a 0.843 and a Gini coefficient of 46.6. The main industries in Chile are the mining

industry, foodstuffs, fish processing, wood, transport equipment and others like cement and

textiles.

The largest sectors by GDP are mining and manufacturing industry, agriculture and the

services. Mining compromises a 32.8% of the GDP. With its large amount of copper resources

and having a healthy environment, it produces 1/3 of the global copper output. Also, the

mining industry consists of a growing offer, and investment of, lithium extraction. The

agricultural sector holds 4.2% of the GDP. The sector is mostly made up by the wine industry,

the production of salmon and forestry. The largest sector is services, consisting of aeronautical

services, tourism, retail, construction services, education and health, holding 63% of the total of

the Chilean GDP.

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