Monetary Mercantilism

Chile’s Central Bank has finally decided to intervene in the local currency market in order to avoid a further appreciation of the peso against the U.S. dollar. In doing this, Chile joins a monetary policy trend that includes most Latin American countries, particularly Argentina, Bolivia, Peru, Colombia, Costa Rica and Guatemala.

Until recently, Chilean monetary policy was regarded as an example for all Latin America. Chile was mentioned frequently — especially by defenders of “monetary sovereignty” — as a model of how a Latin American country can have both a national currency and monetary stability.

However, alarm bells started ringing last year when inflation tripled to almost 8 percent, mainly because of an excessive increase in public spending by the government of Michelle Bachelet. Now, by deciding to abandon the historic policy of free floatation of the peso, Chile’s Central Bank further compromises this year inflation’s target.

Aiming for a cheaper peso will prove very expensive for Chileans.