Chile’s Unidad de Fomento
The Unidad de Fomento (UF) was introduced in Chile in January 1967 by the
Suprintendencia de Bancos e Instituciones Financieras, a government regulatory agency.
As far as I have been able to determine, the UF is the world’s first successful indexed unit
of account. That is, it is the first time that indexation was achieved by quoting prices in a
money-like unit, rather than relying on an indexation formula.
Chile had issued an earlier unit of account in 1960, the Unidad Reajustable or UR,
which was based both on price and wage indices, but it was not very successful. The UF
was and is an amount of currency related to the Indice de Precios al Consumidor (IPC), the
consumer price index for Chile. Originally, the UF was calculated three times a year, and
was calculated monthly between 1975 and 1977, but daily adjustments in the UF have been
made since 1977. The UF is now a lagged daily interpolation of the monthly consumer price
index. The formula for computation of the UF on day t is:
UFt = UFt–1 x (1+y)1/d 1/d (means exponential days)
where y is the inflation rate for the calendar month preceding the calendar month in which
t falls if t is between day ten and the last day of the month (and d is the number of days in
the calendar month in which t falls), and is the inflation rate for the second calendar month
before the calendar month in which t falls if t is between day one and day nine of the month
(and d is the number of days in the calendar month before the calendar month in which t
falls). Since the inflation rate for a calendar month is computed using the consumer price
index for that month and for the preceding month, the UFs within a given calendar month
will depend on the consumer price index for each of the three preceding months (e.g., the
April UFs will depend before April ten on the consumer price index for January and
February, and starting with April ten on the consumer price index for February and March).
The use of the UFs by the public did not become habitual until the early 1980s, about
fifteen years after their introduction, though only a few years after the values were produced
on a daily basis (Levin, 1995). Now, the UF is widely used in Chile.
Most bank deposits in Chile are 30-day nonindexed deposits or 90-day indexed deposits
whose rates are expressed in terms of the UFs. Interest rates on the indexed deposits are
expressed as a premium over the UFs. On maturity, the deposits are converted back to pesos
at the current UF rate. Because indexed and unindexed bank deposits coexist, one might say
that the Chilean banking system is partially indexed using the UFs. Deposits denominated
in US dollars are also permitted for maturities over 30 days. The UF is used in Chile for
nearly all mortgages, car loans, and long-term government securities. All taxes are
expressed in UFs. Pension payments are automatically tied to the UF. Executive stock
options sometimes have strike prices denominated in UFs. The UF is widely used for rent
payments. Alimony and child support payments are often denominated in UFs. Office
properties for sale are usually quoted in UFs. Houses for sale are often quoted in UFs,
though pesos are also used. However, the UF is not so commonly used for selling prices of
automobiles, nor is it used commonly directly as way of setting salaries. Wages and salaries
are denominated in pesos and only indirectly influenced by the UF, in that the change in the
peso value of the UF is taken into account in wage and salary deliberations.
An indexed unit of account, such as the Unidad de Fomento (UF) in Chile, is a money
analogue that can be used to price items for sale or to specify amounts to be repaid in the
future. While it is in a sense a sort of money, it is not true money since it is not a medium
of exchange, and has no physical embodiment like coins, notes, or reserve balances. An
exchange rate between the unit and the true money or legal tender, in Chile the peso, is
defined using an index number (such as the consumer price index), and payments are
executed in money. Thus, the indexed units of account facilitate payments that are tied to
the index number, without being a means of payment.
Indexed Units of Account:
Theory and Assessment of Historical Experience
by Robert J. Shiller
The Unidad de Fomento (UF) was introduced in Chile in January 1967 by the
Suprintendencia de Bancos e Instituciones Financieras, a government regulatory agency.
As far as I have been able to determine, the UF is the world’s first successful indexed unit
of account. That is, it is the first time that indexation was achieved by quoting prices in a
money-like unit, rather than relying on an indexation formula.
Chile had issued an earlier unit of account in 1960, the Unidad Reajustable or UR,
which was based both on price and wage indices, but it was not very successful. The UF
was and is an amount of currency related to the Indice de Precios al Consumidor (IPC), the
consumer price index for Chile. Originally, the UF was calculated three times a year, and
was calculated monthly between 1975 and 1977, but daily adjustments in the UF have been
made since 1977. The UF is now a lagged daily interpolation of the monthly consumer price
index. The formula for computation of the UF on day t is:
UFt = UFt–1 x (1+y)1/d 1/d (means exponential days)
where y is the inflation rate for the calendar month preceding the calendar month in which
t falls if t is between day ten and the last day of the month (and d is the number of days in
the calendar month in which t falls), and is the inflation rate for the second calendar month
before the calendar month in which t falls if t is between day one and day nine of the month
(and d is the number of days in the calendar month before the calendar month in which t
falls). Since the inflation rate for a calendar month is computed using the consumer price
index for that month and for the preceding month, the UFs within a given calendar month
will depend on the consumer price index for each of the three preceding months (e.g., the
April UFs will depend before April ten on the consumer price index for January and
February, and starting with April ten on the consumer price index for February and March).
The use of the UFs by the public did not become habitual until the early 1980s, about
fifteen years after their introduction, though only a few years after the values were produced
on a daily basis (Levin, 1995). Now, the UF is widely used in Chile.
Most bank deposits in Chile are 30-day nonindexed deposits or 90-day indexed deposits
whose rates are expressed in terms of the UFs. Interest rates on the indexed deposits are
expressed as a premium over the UFs. On maturity, the deposits are converted back to pesos
at the current UF rate. Because indexed and unindexed bank deposits coexist, one might say
that the Chilean banking system is partially indexed using the UFs. Deposits denominated
in US dollars are also permitted for maturities over 30 days. The UF is used in Chile for
nearly all mortgages, car loans, and long-term government securities. All taxes are
expressed in UFs. Pension payments are automatically tied to the UF. Executive stock
options sometimes have strike prices denominated in UFs. The UF is widely used for rent
payments. Alimony and child support payments are often denominated in UFs. Office
properties for sale are usually quoted in UFs. Houses for sale are often quoted in UFs,
though pesos are also used. However, the UF is not so commonly used for selling prices of
automobiles, nor is it used commonly directly as way of setting salaries. Wages and salaries
are denominated in pesos and only indirectly influenced by the UF, in that the change in the
peso value of the UF is taken into account in wage and salary deliberations.
An indexed unit of account, such as the Unidad de Fomento (UF) in Chile, is a money
analogue that can be used to price items for sale or to specify amounts to be repaid in the
future. While it is in a sense a sort of money, it is not true money since it is not a medium
of exchange, and has no physical embodiment like coins, notes, or reserve balances. An
exchange rate between the unit and the true money or legal tender, in Chile the peso, is
defined using an index number (such as the consumer price index), and payments are
executed in money. Thus, the indexed units of account facilitate payments that are tied to
the index number, without being a means of payment.
Indexed Units of Account:
Theory and Assessment of Historical Experience
by Robert J. Shiller
