Application Chile Mismanages Its Exchange Rate 
Chile provides particularly dramatic illustration of the unfortunate effects of a fixed nominal exchange rate combined with high domestic inflation. As part of its plan to bring down the rate of Chilean inflation, the government fixed the exchange rate in the middle of 1979 at 39 pesos to the U.S. dollar. Over the next two and a half years, the Chilean price level rose 60%, but U.S. prices rose by only about 30%. Thus, by early 1982, the Chilean peso had appreciated in real terms by approximately 23% (1.6/1.3 − 1) against the U.S. dollar. These data are summarized in Exhibit 11.4.