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Chile's Peso: Better Than (Just) Living with the Dollar?

Author

Listed:
  • Felipe Morandé
  • Klaus Schmidt-Hebbel

Abstract

The choice between maintaining or giving up the national currency is determined by putting on balance the benefits of macroeconomic flexibility derived from a floating exchange rate and an independent monetary policy, and the microeconomic benefits derived from joining a currency union or adopting unilaterally a foreign currency. This paper assesses this choice for Chile. The country’s financial development and macroeconomic stability imply low microeconomic and efficiency costs in sticking to the peso. An evaluation of optimal currency-area criteria shows that Chile is not a natural candidate for joining a monetary union with prospective partners in Latin America, NAFTA, or the European Union. Unilateral dollarization is even less beneficial. Among Southern Hemisphere countries with various exchange rate regimes, Chile would gain the least from giving up its national currency. For a country like Chile, subject to large idiosyncratic shocks and significant temporary price and wage rigidity, a flexible exchange rate and an independent monetary policy anchored to an inflation target comprise the dominant regime choice.

Suggested Citation

  • Felipe Morandé & Klaus Schmidt-Hebbel, 2000. "Chile's Peso: Better Than (Just) Living with the Dollar?," Working Papers Central Bank of Chile 68, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:68
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_68.pdf
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    Cited by:

    1. von Furstenberg, George M., 2006. "Mexico versus Canada: Stability benefits from making common currency with USD?," The North American Journal of Economics and Finance, Elsevier, vol. 17(1), pages 65-78, March.
    2. Felipe G. Morandé & Matías Tapia, 2002. "Exchange Rate Policy in Chile: From the Band to Floating and Beyond," Working Papers Central Bank of Chile 152, Central Bank of Chile.
    3. Aloisio Araujo & Marcia Leon, 2002. "Speculative Attacks on Debts, Dollarization and Optimum Currency Areas," Working Papers Series 40, Central Bank of Brazil, Research Department.
    4. Vittorio Corbo & Klaus Schmidt-Hebbel, 2001. "Inflation Targeting in Latin America," Working Papers Central Bank of Chile 105, Central Bank of Chile.
    5. Grandes, Martín & Reisen, Helmut, 2005. "Exchange rate regimes and macroeconomic performance in Argentina, Brazil and Mexico," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), August.
    6. Corbo, Vittorio, 2002. "Exchange Rate Regimes in the Americas: Is Dollarization the Solution?," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(S1), pages 91-111, December.
    7. Hochreiter, Eduard & Schmidt-Hebbel, Klaus & Winckler, Georg, 2002. "Monetary union: European lessons, Latin American prospects," The North American Journal of Economics and Finance, Elsevier, vol. 13(3), pages 297-321, December.
    8. Corbo, Vittorio, 2001. "Is it time for a common currency for the Americas?," Journal of Policy Modeling, Elsevier, vol. 23(3), pages 241-248, April.
    9. Felipe Morandé L. & Matías Tapia G., 2002. "Exchange Rate Policy in Chile: the Abandonment of the Band and the Floating Experience," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 5(3), pages 67-94, December.
    10. Martin Grandes & Helmut Reisen, 2003. "Hard Peg versus Soft Float. A Tale of Two Latin-American Countries," Revue économique, Presses de Sciences-Po, vol. 54(5), pages 1057-1090.

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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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