Milton Friedman and Exchange Rates in Developing Countries
Milton Friedman’s famous 1953 essay, “The case for flexible exchange rates,” deals entirely with advanced nations. An interesting question is what Friedman thought about exchange rate and monetary regimes in emerging economies. In this paper I investigate how his views on the subject evolved through time. I analyze speeches, articles, and interviews. I examine his archives for correspondence and unpublished manuscripts. I show that for him flexible rates were a second best solution for middle income and poor nations. I also analyze Friedman’s role in Chile’s failed attempt, during the Pinochet regime, at using a fixed exchange rate to stabilize the economy and eliminate inflation.
I have benefited from conversations with Al Harberger and Rolf Luders, both of whom attended Milton Friedman’s meeting with General Augusto Pinochet in 1975, in Santiago, Chile. Comments by Maury Obstfed, Doug Irwin, Michael Bordo, Ed Nelson, Leon Montes, Fernando Losada, Bruce Caldwell, and George Tavlas have been extremely useful. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.