Exchange Rate Volatility in Emerging Markets: The Chilean Case

This paper empirically investigates the volatility of the Chilean pegged exchange rate regime using a target zone model. Using the ARCH model, this paper tests the exchange rate volatility in the presence of different levels of foreign reserves and other macro shocks. it is found that the domestic credit, domestic debt, and foreign debt have the largest volatility of the variables tested when compared with other fundamental variables. The variance of the exchange rate is heteroskedastic but not persistent, which implies that the exchange rate was stable, probably moving within the band. The exchange rate volatility fluctuates more with domestic and foreign debt than with the other variables tested.