The Economics of Financial Markets Essay

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How exchange rate policies and systems characterize the countries of South America:
Exchange rate plays a key role in development of South American economy. The exchange rate has enormously influenced the economy of these regions particularly from 1960’s when the economy was mostly characterized by import substitution, and 1970’s when foreign debt was significantly increased. Exchange rate has been very instrumental in formulation of government policies in these regions. In fact, “many analysts regard exchange rate policy as a major determinant of other economical outcomes, such as adjustment to the oil shocks of the 1970’s and the debt the debt crisis of the 1980’s” (Frieden & Ernesto, 2010) Generally speaking, there were four principal categories of exchange rate regimes in Latin America as discussed by Kiguel Alberto:
(i) Countries with fixed exchange rates where devaluations are a rare event (e.g. Venezuela till 1982), (ii) countries with fixed exchange rates but with periodic devaluations (e.g. Chile, Colombia, Peru and Uruguay in the fifties and sixties), (iii) countries with a pronounced devolution(the famous Tablitas in the late seventies in the southern cone and the exchange rate rule in Mexico more recently), (iv) countries with a passive crawling peg (Brazil between 1968 and 1986,Colombia since 1967), (v)countries that for a short span adopted a flexible exchange rate (e.g. Venezuela in 1989 and Peru in 1990). (1992, p. 6)
The regimes have varied overtime, moving from fixed exchange rates (with periodic devaluations) to more flexible exchange rates (where crawling peg was adopted) and later, max-devaluations. More recently, the exchange rate is creeping back to a more stable outlook.
In accordance with exchange rate...

... middle of paper ... instability could continue causing harm to the economy.

1. Darrat, F. Elkhal, K. & Hakim, S. (2000). On The Integration of Emerging Stock Market In Middle East.Journal of Economics Development. 25, 2-17.
2. Gellati, M. A wavelet analysis of MENA stock markets. JOURNAL OF RESEARCH WORKING PAPERS 596, 4-9.
3. Frieden,L & Ernesto, P. 2010. (2009). Preliminary Overview of the Economies of Latin America and the Caribbean 2008. United Nations Publications.
4. Hall, M. (2005). Exchange rate crises in developing countries: the political role of the banking sector. Ashgate Publishing, Ltd
5. Khan, M & Reinhart, C. (1995). Capital flows in the APEC region. Occasional paper (International Monetary Fund), 122, 803-809.
6. Kiguel, A. (1992). Policy research working papers. Policy research working papers: Macroeconomic adjustment and growth, 880, 78-79.

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