Exchange rate management in Latin America: towards the making of a policy target exchange rate

Two defining aspects of exchange rates in recent years have been their volatility and misalignment. These features, which have been especially prominent for developing and emerging economies (DEEs), have attracted increasing interest in academic and policymaking circles. This volatility has run counter to claims by academic supporters of free-floating exchange rates that a flexible system does not have to be an unstable system; for policymakers, exchange rate volatility has had problematic consequences for short- and long-term investment decisions, which have led to exchange rate misalignments and to balance of payments problems. Post-Keynesian economists have not been silent in this debate; they have suggested that market volatility should be countered by exchange rate management, since sustaining competitive and stable real exchange rates can provide the basis for meeting employment and growth objectives. This chapter participates in this debate about whether exchange rates should be managed by laying the foundations for defining what we term the “Policy Target Exchange Rate”. It is motivated by experience in Latin America, since exchange rates in this region are among the most important policy variables and the idea of exchange rate targeting has been widely discussed. Our aim is to build the groundwork for a post-Keynesian theoretical approach to the challenges of exchange rate management.