A New Breed of Exchange Rate Bands: Chile, Israel and Mexico

Following inflation stabilization programmes where a fixed exchange rate is used as an anchor, a number of countries have gradually shifted towards a regime of increased flexibility. In particular, Chile, Israel and Mexico have adopted for a few years a regime of crawling exchange rate bands. This article documents and analyzes their unique experience. Of immediate concern is the question whether the shift from fixed to crawling bands is perceived as the signal of a tilt towards policy relaxation. On the contrary, it could be seen as a way of restoring external competitiveness after a period of real appreciation. The evidence collected in this article supports the latter view. As a way of moving towards a sustainable equilibrium, the shift to crawling bands is found to have a stabilizing influence on financial markets, on inflation expectations, and on the passthrough from exchange rates to prices.