Exchange rates, inflation, and disinflation: Latin American experiences

Abstract

Introduction In spite of the collapse of the Bretton Woods system in 1973, most of the developing countries, including many Latin American nations, continued to rely heavily on fixed exchange rates throughout the 1970s. The December 1979 issue of International Financial Statistics ( IFS ) reports that thirteen Latin American countries had a fixed exchange rate system at that time. Many of these countries, in fact, had had a fixed exchange rate for a very long period of time – in some cases, such as Guatemala, since the 1920s. Recently, however, a large number of developing countries have adopted more flexible exchange rate regimes. For example, according to the December 1990 issue of the IFS only three Latin American countries – Dominican Republic, Haiti, and Panama – had a fixed exchange rate system at that time. This abandonment of fixed exchange rates was, to a considerable extent, associated with the debt crisis unleashed in 1982. In order to make major resource transfers to their creditors, the vast majority of the Latin American countries adopted adjustment packages that included as a key component very large nominal devaluations. These devaluations differed in an important way from the traditional norm in Latin America. Most historical exchange rate adjustments in the region were followed by the establishment of a new peg; however, in the 1980s almost every one of these large devaluations was followed by the adoption of some type of managed (adjustable) exchange rate regime.

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