April 2010, Roberto Frenkel and Martín Rapetti

This paper analyzes the experience of the major Latin American countries including Argentina, Brazil, Mexico, Colombia, Chile, Peru and others in the post-World-War period, up to the crisis caused by the collapse of the U.S. housing bubble.

The authors provide a detailed historical analysis that takes into account the most important economic events that helped determine exchange rate policy, and evaluates the strengths and weaknesses of the various exchange rate regimes, and their impact on outcomes including economic growth and inflation.

The authors find that an overvalued real exchange rate can lead to disastrous outcomes for short and intermediate term growth, as happened in the Southern Cone countries in the 1970s as well as Argentina in the late 1990s.

On the other hand, some of the most successful growth experiences in Latin America have occurred under governments that targeted a stable and competitive exchange rate: the Brazilian “economic miracle” beginning in the late 1960s, Chile in the mid-1980s and mid-90s, Argentina and Colombia between the mid-1960s and mid-1970s, and Argentina from 2002-2008. The paper comes at a time when the IMF is engaged has indicated a rethinking of its macroeconomic policies. A recent IMF Staff Position Note co-authored by IMF Chief Economist Olivier Blanchard argues that “Central banks in small open economies should openly recognize that exchange rate stability is part of their objective function.”

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