Exchange Rate Regimes in Latin America: The Growing Attraction for Floating Rate Regimes - An Outlook

Most Latin American countries now have floating exchange rates. However, central banks still have the possibility to intervene in the forex market, either directly or through regulations that influence this market. Floating rates have not always been the standard for forex policies. On the contrary, until the early 90s, exchange rates were among the main “anchors” to fight against inflation, then at very high levels in some countries. These strategies had at best mixed performance; quite often, they induced unbearable external deficits. Then, many central banks, whose independence was established or reinforced, progressively shifted towards “inflation targeting” strategies, reducing the role of exchange rates and allowing them to float, at least in most large Latin American countries. However, raw material prices fluctuations (first appreciating, then falling) have led many central banks to intervene, sometimes actively, in their foreign exchange market.