The trade-off has been present in the academic and economic policy debate for many decades and, although opinions differ in terms of acknowledging the difficulties caused by exchange rate volatility, the benefits of a floating exchange rate to safeguard macroeconomic stability are perceived to trump these difficulties. For one thing, over the past decade the credible Chilean policy of flexible exchange rates has brought about a nearly total elimination of currency mismatches in the corporate sector that had hindered monetary policy making for so many years. Structural challenges In a context of good commodity prices and favorable access to credit, the phenomenon of real exchange rate appreciation poses structural challenges to economies in the region. I would like to focus on three issues that have been widely discussed in business, political, and academic circles. 5  Dornbusch, R., (1983), “Real Interest Rates, Home Goods, and Optimal External Borrowing”, Journal of Political Economy 91(1). 6  Calvo, G., A. Izquierdo and E. Talvi, (2003), “Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina’s Lessons,” NBER Working Paper 9828. BIS central bankers’ speeches  3  First, it is worth emphasizing that part of the appreciation of the real exchange rate reflects the proceeds from the higher prices of our main exports. The resulting increases in expenditure and investment push up the price of services and wages, which is the counterpart of exchange rate appreciation.
Their conclusion is clear: “For debt-intolerant countries, sustaining access to capital markets can be problematic unless debt ratios are quickly brought down to safer levels. To assess how such ‘deleveraging’ might be accomplished, we examine how, historically, emerging market economies with substantial external debts have managed to work them down. To our knowledge, this is a phenomenon that has previously received very little, if any, attention. We analyze episodes of large debt reversals, where countries’ external debt fell by more than 25 percentage points of GNP over a three-year period. Of the twenty-two such reversals that we identify for a broad group of middle-income countries since 1970, two-thirds involved some form of default or restructuring. Only in one case – Swaziland in 1985 – was a country  1  Sources: World Bank, Moody’s and IMF (WEO, April 2012). 2  Reinhart, C., M. Savastano and K. Rogoff, (2003), “Debt Intolerance”, Brookings Papers on Economic Activity 1. BIS central bankers’ speeches  1  able to bring down a high ratio of external debt to GNP solely as a result of rapid output growth.” Thus, in the early 2000s, there were widespread expectations that a default would occur. Overall, the history of Latin America in the 2000s did not go as expected. During the first decade of the twenty-first century, Latin American countries succeeded in lowering their levels of external debt by nearly 20 percent of GDP.