Coping With Chile’s External Vulnerability: A Financial Problem
AbstractWith traditional domestic imbalances long under control, the Chilean business cycle is driven by external shocks. Most importantly, Chile’s external vulnerability is primarily a financial problem. A decline in the Chilean termsof- trade, for example, is associated to a decline in real GDP that is many times larger than one would predict in the presence of perfect financial markets. The financial nature of this excess-sensitivity has two central dimensions: a sharp contraction in Chile’s access to international financial markets when it needs it the most; and an inefficient reallocation of this scarce access across domestic borrowers during external crises. In this paper I characterize this financial mechanism and argue that Chile’s aggregate volatility can be reduced significantly by fostering the private sector’s development of financial instruments that are contingent on Chile’s main external shocks. As a first step, the Central Bank or IFIs could issue a benchmark instrument contingent on these shocks. I also advocate a countercyclical monetary policy but mainly for incentive —that is, as a substitute for taxes on capital inflows and equivalent measures— rather than for ex-post liquidity purposes.
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Bibliographic InfoArticle provided by Central Bank of Chile in its journal Economía Chilena.
Volume (Year): 5 (2002)
Issue (Month): 1 (April)
Other versions of this item:
- Ricardo Caballero, 2002. "Coping with Chile´s External Vulnerability: a Financial Problem," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Economic Growth: Sources, Trends, and Cycles, edition 1, volume 6, chapter 12, pages 377-416 Central Bank of Chile.
- Ricardo J. Caballero, 2002. "Coping with Chile’s External Vulnerability: A Financial Problem," Working Papers Central Bank of Chile 154, Central Bank of Chile.
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