A Concise History of Exchange Rate Regimes in Latin America about the Authors Acknowledgements Conceptual Framework

Executive Summary This paper analyzes exchange rate regimes implemented by the major Latin American countries since the Second World War, with special attention to the period of the second globalization process beginning in the 1970s. A central argument is that exchange rate policy has played a significant role in shaping many of the macroeconomic outcomes observed during these decades. The choice of exchange rate regimes has decisive implications for the behavior of the nominal exchange rate (NER). This is a key macroeconomic variable that affects the behavior of relevant nominal and real variables, including the inflation rate, the balance of payments, output and employment levels and the rate of economic growth. In this regard, the exchange rate regime can have a decisive influence on four key economic policy objectives: a) Price stability b) Domestic financial stability and robustness c) External and internal balances d) Economic growth/development The choice of exchange rate regimes in Latin America has been influenced to a great extent by the historically 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. Between the late 1960s and the early 1970s, Latin American countries began to face a significantly different international 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 developed countries from fixed to floating exchange rates, which strongly stimulated the development of foreign exchange markets and their derivatives. Second, OPEC countries generated the first coordinated rise in the price of oil. This shock rapidly caused large current account imbalances in oil-importing countries and at the same time supplied the incipient Eurodollar market with abundant liquidity. Since that period there has been secular growth in international capital flows concurrent with a progressive deregulation 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 its crawling peg regime after the oil shock of 1973 and also its previous monetary policy. Its current account deficit and foreign debt followed rising trends. During the first half of the 1970s, Argentina, Chile …