2  BIS Review 65/2002  What determines the real exchange rate in the longer run? Table 1. Nominal and real depreciation, and inflation differential against the euro area 1970- 2001 Percent, annual averages Period  Nominal depreciation  Inflation differential (Sweden – euro area)  Real depreciation  1970 – 1982  2,60  0,75  1,84  1983 – 1992  1,50  2,52  -1,02  1993 – 2001  1,88  -0,56  2,45  W hole period  2,05  0,94  1,11  Remark: Prior to 1999 the SEK/EUR rate is a geometric mean of the nominal exchange rates between the krona and each euro-country currency. The weights are relative TCW weights. Source: Sveriges Riksbank. I have already talked about the real exchange rate and tried to explain that it is this rate, rather than the nominal exchange rate, which is most pertinent for economic decisions and for resource allocation within and between economies. An understanding of the real exchange rate's development, above all in the somewhat longer term, is needed in order to appreciate why nominal exchange rates fluctuate as they do. Here I shall use the Swedish krona relative to the euro as a specific example. Since 1970 the krona has depreciated by about 90 per cent against the euro currencies. What lies behind this?
These trends have been particularly visible in Latin America. During 2012, annual gross capital inflows to the seven largest Latin American countries – as classified by the IMF – amounted to more than 250 billion dollars. Sovereign EMBI spreads shrank to around 150 basis points, and, with a few exceptions, stock market prices recovered or surpassed their pre‐crisis levels.1 After the large depreciation suffered at the peak of the crisis, the real exchange rates of these countries persistently appreciated, continuing with a trend coming from the mid‐2000s. House prices in the region also experienced high annual growth rates, in many cases reaching two‐ digit figures. Chile was no exception to these patterns, although they were a bit less pronounced than in the average emerging or Latin American country. Our real exchange rate appreciated by about 15 percent between the peak of the crisis and the end of 2012, real house prices grew about 20 percent between 2009 and 2012, and our current account moved from a surplus of 2 percent of GDP in the last quarter of 2009, to a deficit of 3.5 percent of GDP by the end of 2012. Sure enough, these patterns could be explained by pull factors. The faster recovery of growth rates in emerging markets, the quick rebound of their commodity prices after the crisis, and the sounder policies being implemented by several of them during the last decade could give reason to allocate more capital to this group of countries.