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Latin America’s Currency Roller Coaster

BUENOS AIRES – Ever since World War II, the countries of Latin America have served as something of a currency laboratory. Across the region, countless exchange-rate regimes have been tried – some succeeding, others failing abysmally.

In all cases, however, exchange-rate policies have played a central role in determining these countries’ overall macroeconomic results. And today, after two turbulent decades, they seem to be converging toward a more unified and sustainable framework.

The 1980’s was a harrowing decade for most Latin American countries. The second oil shock and high international interest rates, coupled with a lack of foreign investment, led to significant internal and external imbalances and high levels of foreign debt. In all the major countries, this resulted in defaults, significant and continuous exchange-rate adjustments, and, by the end of the decade, a severe inflation/devaluation spiral, bordering, in some cases, on hyperinflation.

These traumatic events set the stage for Latin America’s two-decade-long currency roller coaster. That experience was marked by the attempt to use a fixed exchange-rate regime as the main policy instrument to control inflation; that attempt’s colossal failure; and the shift, over the last decade, to more flexible regimes, freeing the exchange rate from playing a central role in controlling inflation, but not necessarily allowing a pure float in world currency markets.