Download Monetary Policy in the US & Exchange Rate Management:The

Monetary Policy in the US and
Exchange Rate Management: The
Chilean Experience and More
José De Gregorio
Vice Governor
Central Bank of Chile
May 18, 2007
I. High Correlation of Monetary Policy Stance: Do
emerging markets follow US monetary Policy?
• In the context of inflation targeting monetary policy should be geared by
inflation perspectives rather than developments in world monetary policy.
• Movements in world monetary policies affect emerging markets via growth
prospects in the world and exchange rate fluctuations, but effects appear
to be small given recent magnitude of interest rate changes.
• The high correlation is the result of correlation in inflation developments
rather than follower-strategy.
• The case of Chile-US. Currently, the policy rate in Chile is below than that
of the US.
2
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
Chile
Sep-04
May-04
5.0
Jan-04
Sep-03
May-03
Jan-03
Sep-02
May-02
Jan-02
Sep-01
May-01
Jan-01
Sep-00
May-00
Jan-00
%
9.0
Monetary Policy Interest Rate
Chile - U.S.
8.0
7.0
6.0
U.S.
4.0
3.0
2.0
1.0
0.0
3
GDP Quarterly Growth, Chile - U.S.
(y-o-y)
9.0
8.0
7.0
Chile
6.0
U.S.
%
5.0
4.0
3.0
2.0
1.0
0.0
00
III.
01
III.
02
III.
03
III.
04
III.
05
III.
06
III.
07
4
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
CPI (Chile)
May-02
Jan-02
Sep-01
May-01
Jan-01
Sep-00
May-00
Jan-00
%
Inflation Chile - U.S.
5.0
4.0
3.0
2.0
1.0
PCE (US)
0.0
-1.0
5
1.0
Jan-00
Apr-00
Jul-00
Oct-00
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
%
Core Inflation, Chile - U.S.
3.5
3.0
2.5
2.0
1.5
IPC Core (Chile)
PCE Core (US)
0.5
0.0
6
II. Exchange Rate Policies: Leaning Against the Wind
and Floating?
• Is it possible to lean against the wind? Why Chile, a floater, has been one of the
countries with the smallest appreciation and the largest terms of trade gain?
• Leaning against the wind may induce further capital inflows an pressures on the
exchange rates. Non-credible interventions encourage inflows and loopholes on
capital inflows generate large benefits to “loopholers”
• Interpretation of Levi-Yeyati and Sturzenegger (2007). Fear of revaluation
(temporary) reduces real interest rate in dollars, it drives up capital inflows,
relaxes liquidity constraints and generates a boom, not in export but in investment
and perhaps mostly in non-tradables. But, what next?
• Openness - Terms of trade – real exchange rate – export performance and
concentration. Which are the causal relationship?
7
RER (index, left)
2006p
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1986 = 100
130
3.5
110
3.0
90
2.5
70
2.0
50
1.5
30
1.0
10
0.5
US$2005/lb
Real Exchange Rate and Price of Copper
Copper price (right)
8
2006:1
2005:1
2004:1
2003:1
2002:1
2001:1
2000:1
1999:1
1998:1
1997:1
1996:1
1995:1
1994:1
1993:1
1992:1
Total
1991:1
1990:1
150
1989:1
1988:1
1987:1
1986:1
2002 = 100
Terms of Trade
200
Copper excluded
100
50
9
Real exchange rate 1987-2007
700
700
650
650
600
600
550
550
500
500
450
450
400
400
87
89
91
Nominal equivalent
93
95
97
99
Average 1987-2006
01
03
05
07
Average 1992-2006
Fuente: Banco Central de Chile.
10
Exchange Rate Regime and International Borrowing
Table 4: Dependent variable: Change in the Debt to GDP ratio 1991-1997
(1)
Classification de jure
(2)
(3)
Classification de Facto
(6)
(7)
(4)
(5)
0.170** 0.166*** 0.148**
(0.068)
(0.065) (0.071)
0.095*
(0.059)
0.181**
(0.074)
0.169
(0.067)
0.184**
(0.074)
0.135**
(0.063)
Exchange rate
Volatility
0.111
(0.391)
0.216
(0.389)
0.255
(0.417)
-0.268
(0.39)
-0.206
(0.382)
-0.350
(0.405)
-0.074
(0.413)
Capital controls
0.035
(0.032)
-0.029
(0.028)
0.05
(0.033)
0.052*
(0.029)
Growth forecast
1990-1995
0.553
(1.413)
Fixed and managed
exchange rate
0.05
(0.412)
1.011
(1.391)
0.445
(1.443)
(8)
(9)
-0.018
(0.039)
0.028
(0.033)
0.965
(1.479)
0.995
(1.442)
External debt/GDP -0.029*** -0.474*** -0.36*** -0.595*** -0.385*** -0.521*** -0.39*** -0.617*** -0.356***
1990
(0.087)
(0.076) (0.116) (0.059)
(0.09)
(0.069)
(0.122)
(0.39)
(0.109)
R2
0.49
0.58
0.42
0.84
0.49
0.61
0.47
0.86
0.38
No. Of obs
27
37
29
56
26
34
27
47
31
Notes: *, **, and ***, significant at 10%, 5% and 1% significance level. All regressions estimated with OLS.
Source: Cowan and De Gregorio (2005)
11
• Policies that provide partial insurance on forex fluctuations inhibit
foreign exchange market developments (hedges).
• The importance of the fiscal contribution. Although marginal effects
may be limited (as those reported by Calderón and Perry), the
existence of a fiscal framework may contain exchange rate
pressures.
• Causality on concentration and real exchange rate: improvement in
terms of trade rises value of current exportable goods (concentrated
perhaps) and we will see a positive correlation between real
exchange rate and concentration. Is the desirable a depreciation as
result of a trems of trade decline?
12
Forex Derivatives Market (turnover) and Exchange
Rate Regime
2001
Veces PIB/COMEX
35
30
25
20
15
10
5
0
Peg
Mix
DER/PIB
Floating
DER/COMEX
Source: De Gregorio and Tokman (2004)
13
Fiscal Balance and Price of Copper
10
3.5
0
2.0
-5
1.5
-10
1.0
Structural balance (left)
Global balance (left)
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
0.5
1963
-15
1960
% GDP
2.5
US$2005/lb
3.0
5
Copper price (right)
14
Copper Exports
(% of total exports)
90
80
70
60
50
40
Nominal
Source: Central Bank of Chile
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
30
Real (65-06 avg)
15
III. Concluding Remarks
• Lesson for policy: Latin American economies should try to move to floating
in order to adjust to variable condition in the world.
• Lesson for interpretation of the evidence: growing with forex intervention
is not necessarily sustainable not necessarily good.
• Lesson for research: perhaps we should move to case studies and ask
under what conditions the transition from managed exchange rate to
floating has been made.
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