Unidad de Fomento

Unidad de Fomento

The Central Bank of Chile translates the “Unidad de Fomento” on their website to An Inflation–Indexed Accounting Unit and CPI–Indexed Unit of Account (UF).

      The UF´s value in Chilean escudos was originally (1967) updated every quarter which would be the official rate for the following quarter. The UF´s original value of 100 has never been rebased like most CPIs. It was updated monthly from October 1975, with the currency changeover to pesos, till 1977. Since July 1977 it was calculated daily by interpolation between the 10th of each month and the 9th of the following month, according to the monthly variation of the Indice de Precios al Consumidor (IPC), the Chilean Consumer Price Index. The Banco Central de Chile has calculated and published the UF´s value daily since 1990. The UF is a lagged daily interpolation of the Chilean CPI. The IPC is independently calculated and published monthly by the Chilean National Statistical Institute.

      The UF daily rate is available on the Chilean Central Bank´s website.

      Most bank deposits in Chile are 30–day non–indexed 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. Shiller, 1998, p3.

Nicolaas Smith Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Unidad de Fomento

Hi Motley Fool,


Thank you very much for your comment on my previous blog. I tried to reply via the "Reply" link on my blog and the "Comment" option on my and your blogs, but, nothing worked. So, here is my reply.

I did not know about the UF.

Yes, the Unidad de Fomento results in Chile implementing most of Constant Item Purchasing Power Accounting (CIPPA) since 1967. The wiki article does not indicate whether they account the net monetary gain or loss from inflation. The UF is similar to the Brazilian Unidade Real de Valor (URV). Brazil supplied their economy with a daily index from 1964 to 1994. I also do not know whether Brazil calculated the net monetary loss or gain. I will have to find out.

This will strenghten the case for CIPPA tremendously. I state in the book that all that is missing is due process before CIPPA will replace the Historical Cost Accounting model.

Chile has already taken the next step without the rest of the world even being ready to take the first step towards implementing financial capital maintenance in units of constant purchasing power (CIPPA): Chile not only update constant real value non-monetary items and historical variable real value non-monetary items, but, also monetary items. This is a logical next step. I just did not realize that Chile has been doing it since 1967. So, it seems to me Chile learnt from Brazil. Now it is time for us to learn from them.

"It was created on January 20, 1967, for the use in determining principal (monetary item) and interest (constant item) in international secured loans for development, subject to revaluation according to the variations of inflation. Afterwards it was extended to all types of bank loans (monetary items), private or special financing (monetary items), purchases or investments on installments (constant items), contracts (constant items), and some special situations. Also it is used in legal standards such as the par value of stock/capitalization of companies (constant items), fines (constant items), etc. It has become the preferred and predominant measure for determining the cost of construction (historical variable items: Historical Cost), values of housing (historical variable items) and any secured loan (monetary items), either private or of the Chilean government."

The Wiki article is a very good example of the fact that everyone thinks inflation erodes the real value of non-monetary items: the stable measuring unit assumption is not mentioned at all in the article.

Thank you very much for this information.

Kind regards,

Nicolaas.


Nicolaas Smith

Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.