Chile’s favorable conditions to face exchange rate shocks: a well-developed financial sector, that offers hedging opportunities; and a low and decreasing level of ERpassthrough,contribute to diminish the costs of the floating exchange rate regime, reducing its implied financial and price instability threat, and therefore avoiding fear of floating. Moreover, it provides enough credibility to the current exchange rate system, reinforcing the commitment to making interventions a rare event.

  Download this paper in PDF

We apply regime-switching methods to a monetarist model of exchange rates and identify well-defined intervention policy cycles. The policy response indices include a standard exchange market pressure-based index and a model-based volatility ratio. We find strong evidence that balance sheet effects, proxied by the stock ratio of external liabilities to assets, and economic performance, as measured by GDP and stock market indices, determine the cost of the regime shift.

  Download this paper in PDF

We develop a simple n-country Factor-OCA approach to consider the costs and benefits of joining Monteary Unions. We derive anaklytical results, simulate and present two empircial applications based on EMU and Nafta. We find monetary integration has costs for some countries and benefits for others, perhaps explaining why this remains an issue of considerable interest and debate.

  Download this paper in PDF

I study a dual exchange rate system using a sticky-price optimizing model of a small open economy. Changes in foreign demand are shown to produce larger swings in domestic output than with a single-fixed exchange rate. Domestic output is insulated from changes in the foreign interest rate only when the country is neither a net debtor nor creditor internationally. Finally, the government can issue credit to raise output in the face of shocks, but doing so is shown to be welfare reducing.

  Download this paper in PDF