Uruguay

Uruguay initially focused on the exchange rate, which was adjusted at different intervals and rates, while failing to develop strong monetary instruments or policy framework; this was followed by a period of more structured exchange rate change until a financial crisis in 2002, when attention shifted to monetary policy per se and it moved towards inflation targeting without yet having the institutions and instruments required to make that work effectively.

Years Targets and attainment Classification
1974-1991 initially dual exchange rate system with commercial rate, adjusted at frequent but irregular intervals, and financial rate which was largely liberalised in late 1974; high but varying inflation throughout (mostly between 50% and 100%); central bank functions divided between Central Bank and Bank of the Republic; monetary policy initially operated via reserve requirements, central bank rediscount facilities and interest rate regulations; some but limited financial and other liberalisation from 1974-5, complicated by capital inflows (not subject to major controls) and dollarisation; stabilisation measures effective for balance of payments but not for monetary growth or inflation; 1978-9 de facto unification of exchange market and advance publication of schedule of daily exchange rates, with depreciation based on difference between expected external and targeted domestic inflation; reduction in reserve requirements and liberalisation of interest rates; early 1980s renewed fiscal deficits and monetary expansion, followed by return to stabilisation, with some use of open market operations (in form of auctions of Treasury bills); preannounced daily exchange rate schedule scrapped late 1982 in favour of float which was free at first then subject to crawling peg until late 1983, but intervention continues, at first ad hoc, then from late 1985 via frequent adjustments in line with targeted inflation; 1983 Bank of Republic ceases to act in part as central bank, but Central Bank incurs large quasi-fiscal obligations; 1984 reserve requirements changed and compulsory holdings by banks of Treasury bills introduced (in context of high fiscal deficits and dollarisation); from 1985 governments attempt stabilisation focused on fiscal contraction, with further changes to reserve requirements and compulsory holdings of Treasury bills; monetary policy weak in presence of capital openness, rising dollarisation, and problems of loan recovery by banks; repeated slippages on fiscal and monetary targets unstructured discretion UD
1992-2001 exchange rate adjustments formalised from 1992 as 2% depreciation each month, gradually reduced from 1996 to 0.6% by 1998, with initial band of 7% reduced 1998 to 3% (but no further changes); gradual decline in inflation, to below 10% in 1998; efforts from 1990 to bring Bank of Republic (state-owned, dominant force in commercial banking) and Mortgage Bank under more effective Central Bank control; banking supervision strengthened; 1993 currency reform, also central bank bills replaced by Treasury bills and Central Bank’s quasi-fiscal deficit slowly brought under control; moves to develop domestic capital market; banking system remains relatively uncompetitive with high intermediation spreads; 2000 regular wage adjustments (previously every quarter, then every 4, then every 6 months) shifted to once a year; dollarisation remains very high loose converging exchange rate targeting LCERT
2002-17 financial crisis driven by external as well as domestic factors leads to floating of exchange rate June 2002 with large depreciation; for a few years central bank sets (frequently adjusted) intermediate monetary targets, with aim of eventual move to full inflation targeting, but informal inflation targets consistently overshot; some continued forex intervention; late 2007 (seen by IMF as start of inflation targeting) policy rate becomes main monetary instrument, but reserve requirements remain important; dollarisation still high but now declining; 2013 monetary aggregate M1+ made operational target instead of overnight interest rate, but unpredictability of money demand complicates policy while lack of corridor leaves interest rates more volatile; inflation (actual and expected) finally comes within target range 2017, largely as a result of appreciation (but overshoots again in 2018) loosely structured discretion LSD

Selected IMF references: RED 1973 pp32-4, 48-51; RED 1975 pp38-40, 63; RED 1976 pp17-18, 29; SR 1977 pp4-5, 7; SR 1978 pp5-6, 8; RED 1979 pp44-5; SR 1979 pp6-9; RED 1981 pp8, 20-1; RED 1983 pp1-6, 23-4; RED 1984 pp7-8; SR 1984 pp8-12; RED 1985 pp38-9, 61-2, 74-8; SR 1985 pp12-14; RED 1986 pp33-4, 53-5; RED 1989 pp1-3, 52, 82-4; RED 1991 pp1-2, 26; SR 1991 pp2-7, 12; RED 1992 pp12-13, 17, 21; SR 1995 pp1-3; RED 1996 pp8-9, 14-15, 18; SR 1999 pp3, 12-13; RED 2001 pp6, 21-6; SR 2001 pp7-8; SR 2003 pp16-17; 4th Review under SBA February 2004 p15; 6th Review under SBA November 2004 pp15-16; 7th Review under SBA March 2005; SR 2006 pp6, 9, 16-17; SI 2007 pp3, 5, 13; SR 2007 pp5-6, 19-22; SR 2008 pp8, 19-20; SI 2010 pp15, 18, 28-9; SR January 2011 pp6, 12-13, 15-16; SI 2012 pp3-5, 10-12; SR 2012 pp10-11, 14, 27; SR 2013 pp7, 12-14, 32; SR 2015 p29; SR January 2016 pp6, 10, 21-2; SR December 2016 pp14-16; SR 2018 pp12-14, 22; SR 2019 pp13-14, 22.

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