- Owen Evens, and Peter Quirk
- Published Date:
- October 1995
Most financial instruments in Chile are indexed, and the central bank influences the level of domestic real rates mainly through open market operations in its indexed instruments.
The reserve requirement applies without interest for a one-year period, after which the central bank returns the funds.
Another factor may have been a deterioration in the outlook for the peso as the current account went further into deficit, owing in large part to a significant deterioration in Chile’s terms of trade.
Average nominal interest rates in Chile for terms of 30–89 days, deflated by inflation in the preceding 12-month period. (No data are available for offshore peso interest rates.) Alternative deflators (e.g., an average of the preceding and succeeding quarters’ inflation) produce similar results.
This assumption that ex ante views are reasonably well reflected by ex post outturns is quite strong. Further, ex post movements in exchange rates can be quite abrupt, so that the adjusted interest rate differentials calculated in this way can exhibit significant volatility.
Ineffective controls on capital inflows might also be expected to affect the parallel foreign exchange market, which was legalized in April 1990 for all but a specified range of transactions; however, official data on parallel market rates are available only since 1993.
A crawling peg policy was followed until 1991. In June 1991, however, a market-determined regime was introduced, based on the trading of certificates denominated in U.S. dollars arising from export and other foreign exchange receipts that could be exchanged for foreign exchange to make external payments. The central bank continued to prevent the exchange rate from appreciating past a certain point, however, by setting a floor price for repurchase of the certificates before their one-year maturity at a 12.5 percent discount.
Certain exemptions from the deposit requirement were granted, mainly for credits associated with imports of capital goods, as well as specific short-term loans and credits.
In addition to these tightened restrictions, a managed floating exchange regime was introduced in January 1994, with the peso being allowed to float within a 14 percentage point band. In 1994, the midpoint of this band (in peso-U.S. dollar terms) was expected to increase by 11 percent during the year.
The increase in volatility in the differential since December arises because actual ex post exchange rates are used as a proxy for the forward expectations, and so discrete changes in the exchange rate are reflected in large changes in the adjusted interest rate differential.
In February-May 1994, these ringgit funds were also included in the eligible liability base for the calculation of required reserves, resulting in a negative effective interest rate on these balances.
This parallel rate is presently quoted by currency dealers in the United States (Washington, D.C. and Miami). The dissemination of information on black market operations is prohibited in Venezuela. The rate prevailing for transactions in the parallel market operating in Cucuta, at the border with Colombia, and re-ported by Reuters, ranged between Bs 220 and Bs 240 per U.S. dollar in early June 1995.
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