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CEPR Paper: Exchange Rates Are an Important Determinant of Latin America's Economic Performance
WASHINGTON - April 22 - The Center for Economic and Policy Research released a new paper today, coinciding with the IMF/Word Bank Spring Meetings, analyzing the history of exchange rate policy as the region has become more financially globalized.
"This paper indicates that developing countries need to manage their real exchange rate, preferably to keep it stable and competitive," said Mark Weisbrot, Co-Director of CEPR. "The IMF should consider this analysis as it continues the rethinking of macroeconomic policy that it has recently begun."
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."
The CEPR paper, "A Concise History of Exchange Rate Regimes In Latin America," was written by CEPR Senior Research Associate Roberto Frenkel, and Martin Rapetti of the Centro de Estudios de Estado y Sociedad (CEDES), an Argentine think tank.
The authors analyze 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.
They 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 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.