Dedollarization, Indexation and Nominalization: The Chilean Experience

Abstract

This paper is part of the project "Financial Dedollarization: Policy Options" launched by the Inter-American Development Bank. The purpose of the project is to contribute to the policy dialogue on the macroeconomic and prudential risks associated with financial dollarization as well as to evaluate the costs and benefits of alternative financial dedollarization strategies. The project aims at providing guidance on the design of cost-effective policy instruments to reduce financial dollarization, including selective prudential regulation and the development of attractive new markets and instruments in local currency. It focuses on domestic asset holders, as opposed to foreign investors, as the primary targets of a dedollarization strategy. This paper revisits the Chilean experience with dollarization, indexation and nominalization in the 1958-2003 period. The purpose is to understand how Chile generally avoided dollarization and actually dedollarized in the 80s in order to draw some lessons for other countries. This is one of several studies discussed in an IDB/WB Conference at the Inter-American Development Bank, December 1-2, 2003.