De‐dollarization, Indexation and Nominalization: the Chilean Experience

Abstract

This paper revisits the Chilean experience with dollarization, indexation and nominalization in the 1958–2003 period. The purpose is to understand how Chile generally avoided dollarization and actually de‐dollarized in the 1980s in order to draw some lessons for other countries. We find that many policies that Chile pursued are not easy to implement elsewhere. Some key characteristics of the Chilean process are related to initial institutional conditions and developments, whereas others are connected to macroeconomic performance and specific regulations. Indexation plays a key role in explaining how dollarization can be avoided.

Key Words:

• Dollarization
• De‐dollarization
• Indexation
• Chile

JEL Code:

• E42
• E43
• E45
• F30

Acknowledgements

Prepared for the conference ‘Financial Dedollarization’, December 2003, for which we acknowledge financial support of the InterAmerican Development Bank. We thank Eduardo Fernández Arias, Eduardo Levy‐Yeyati, and Felipe Morandé for their valuable comments and Erika Arraño, Natalia Bernal and Verónica Mies for helpful assistance with some of the data. Any remaining errors are our responsibility.

Notes

1. Real loans and deposits did not decline after these measures. Possibly because intermediation was small to begin with (only 1/7 of total loans were financed with time deposits) and there were capital account restrictions, factors (i) and (ii) did not lead to disintermediation.

2. Unfortunately, it is not possible to separate foreign exchange‐indexed deposits and loans from UF‐indexed.

3. The escudo was the currency issued in 1959 to represent 1,000 pesos. In 1975, the peso returned, representing for 1,000 escudos (1 million old pesos).

4. The Central Bank established an open window for selling its short‐term debt instruments, the 30‐day peso bills (PDBC) and 90‐day UF indexed bills (PRBC). The tender rate for the PRBCs was fixed, measured in UF, and adjusted only occasionally according to the desired stance for monetary policy. The nominal interest rates for the PDBC were determined through the Fisher parity, adding the PRBC interest rate to the expected variation for the UF, which was adjusted on a weekly basis based on information from the National Statistics Institute. Occasionally, the Central Bank established an open window to sell other money market instruments at longer maturities, 180 and 360 days, which were denominated in UF.

5. The one‐month inflationary risk was minimal as the Central Bank provided a weekly estimate of the rate of variation of the UF based on CPI advances from the National Statistics Institute.

6. Larraín (1986) estimates foreign assets held abroad by Chileans at the time to be no larger than US$4 billion.