CEPR Paper: Exchange Rates Are an Important Determinant of Latin America's Economic Performance

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.