An Exchange Rate Band in Times of Turbulence: Colombia 1991-96

Alberto Carrasquilla

Borradores de Economia from Banco de la Republica de Colombia

Abstract: In the context of a medium term process of real appreciation, linked largely to fiscal policy and capital inflows, Colombia was hit by a political shock and had to deal with expectations of nominal devaluation. This paper discusses three issues. First, the process of appreciation itself is analyzed in order to sort its causes. Second, the functioning of the exchange rate band is examined. Third, the role of the band in the resolution of the basic policy dilemma is studied. Two conclusions emerge. Firstly, the appreciation process has clear causes and explains departures of nominal exchange rate behavior, within the band, with respect to hypotheses derived from the usual conceptual models. Second, the choice of a band-based exchange rate regime has been very important in securing relatively smooth adjustment in the context of the two contradictory forces facing policy makers in this period.

Date: 1997-03
New Economics Papers: this item is included in nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:070

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