The Impact of Exchange Rate Regimes on Real Exchange Rates in South America, 1990-2002

This paper analyses the impact of exchange rate regimes on real exchange rates, as defined by the relative price of nontradables to tradables in Argentina, Brazil, Chile (ABC) and Mexico from 1990 to 2002. The real exchange rate is determined in the long-run by the Balassa-Samuelson effect, but in the medium run also by government expenditure and terms of trade. Another determinant is fixed exchange rate regimes, which force exporters to adjust their local price of tradables. Moreover, fixed regimes attract portfolio inflows that increase demand and prices for nontradables. The econometric results of the paper confirm the impact of exchange rate regimes on relative prices in all countries except Chile, which maintained exchange rate flexibly and adopted capital controls ...