Comments

Oscar Landerretche:

Tapia and Tokman analyze an interesting scheme for monetary policymakers in the volatile environment of emerging economies. They argue empirically that Chile has been successful in implementing a system of announced exchange rate intervention periods and that the announcements have helped to diminish the volatility of the exchange rate more than the actual interventions. Although they do not theorize profoundly on why this is true, they implicitly find evidence of the preponderance of the information channel for sterilized interventions in the exchange market. A priori this scheme is interesting because it can provide a way for central banks in emerging market to clean up their floating regimes.

Two noteworthy characteristics of the Chilean intervention regimes are perhaps insufficiently emphasized by the authors. First, the intervention periods are transitory and exceptional in the midst of a clean floating exchange rate regime. The context of these events—what makes them so exceptional—is a Central Bank that is increasingly interested in encouraging agents to get used to covering themselves against exchange rate volatility in the market. These exceptional periods will help confirm, rather than refute, the credibility of the flexible exchange rate regime as long as they are only declared when there is a clear sensation that a run against the currency is possible, if not imminent. Second, the intervention periods are announced together with a maximum reserve commitment. This is designed to keep reserves well over the benchmark for a rational run against the Central Bank, hence avoiding the possibility of contributing to the run. This also helps signal that the bank is not involved in a de facto fixation of the exchange rate within a de jure float.

Tapia and Tokman seem to show that this scheme has been effective and cheap. In fact, the actual expenditure of reserves seems to have no effect on the exchange rate. I support the notion that it is an effective scheme, but it is not as cheap as it seems, nor widely applicable among emerging economies.

In practice, the main rationale for the system is what the authors refer to as the information channel. One of the most important characteristics of this channel is that it is assumed that the exchange rate can deviate significantly from its fundamental level. This is exactly the belief that prompted the Central Bank to declare these exceptional intervention periods: namely, the Asian crisis, the Argentine turmoil, and the Brazilian scare were events that could deviate the price of the peso from fundamentals. In my view, this is an assumption of the mechanism.

In this sense, Argentine and Brazilian sneezing toward Chile is completely different from the Asian crisis. The Asian crisis involved the appearance of news that actually revealed to everybody that the fundamentals had changed. For example, it could make a lot of sense to run away from Chile when international demand for commodities is about to collapse. The Argentine and Brazilian problems were different because most people who had no money at stake were already convinced that Chile was decoupled from its larger neighbors. At the same time, investors were somewhat uncertain about the possibility of a run against the peso. The information necessary for everybody to be convinced that a significant piece of the market was not going to run against the peso seems to have been absent. What the Central Bank of Chile did was to provide a contingent asset to holders of peso-denominated instruments. The Central Bank would stop the run with its reserves and provide the market all the reserves it required if it ever seemed as if the market were ready to run. This would give the investor time to adjust optimally when a fundamental depreciation was on the way (1998) or would stop the currency from misaligning itself in the face of a possible run (2001-03). This may explain the finding of an important effect of the announcement of the intervention regime, rather than the intervention itself.

This rationalization implies several conditions for the mechanism to be effective. First, the market has to agree with the Central Bank on the possibility of the run and...