Let it float: empirical evidence on de facto exchange rate regimes and output volatility in Latin America

BERMÚDEZ, CECILIA; DABÚS, CARLOS

Trelew

Congreso; XLVII Reunión Anual de la Asociación Argentina de Economía Política (AAEP); 2012

Universidad Nacional de la Patagonia San Juan Bosco

We estimate de facto exchange rate regimes for seven Latin American economies (1998-2011). Then we build an ‘exchange rate flexibility’ series to address two concerns regarding the evolution of exchange rates in Latin America. Firstly, we show that these economies seem to have overcome their ‘fear of floating’. Secondly, we estimate a PSTM to account for non-linearities between output volatility and exchange rate flexibility. We distinguish two regimes of flexibility. For the highly flexible one, we find a negative link between inflexibility and output volatility. This unusual result could be interpreted as the extent of effectiveness of exchange rate intervention.