Jun 1, 2002

Divergent Paths Interest rates in Mexico and Chile are at historical lows, in spite of the growing uncertainty afflicting most of the region. Chile is located next door to Argentina, but the Chilean Central Bank has seen no reason to aggressively raise interest rates. On the contrary, Chile has borrowed on the international capital markets at record low rates largely because investors are convinced that it will not suffer any serious contagion from its neighbor to the east. Inflation in Mexico is also at a historically low levels and this has allowed the Central Bank, which does not directly manipulate short-term interest rates, to continue withdrawing liquidity from the financial system. However, the currency in both countries has behaved very differently. Both pesos float freely, and although the Mexican peso has faltered recently, it is still remarkably strong. But Chile's peso has struggled to recover from the beating it endured...

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