The Behavior of Interest Rate Differentials Under Shifting Exchange Rate Regimes: The Experience of Chile, Colombia and Israel *‪.‬

This paper studies the dynamics of the interest rate differential across band and floating exchange rate regimes in Chile, Colombia and Israel, and in a benchmark group composed of Italy, Portugal and Spain. Significant differences in the interest rate-exchange rate link are found between the two groups, irrespective of regime. However, in all countries, except Italy, the interest differential ceased to behave anti-cyclically against output after the adoption of floating, possibly because of a perceived need to gain credibility for the new system in the context of an ongoing disinflation process. JEL: E43, E52, F31.