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Capital Account Policies in Chile Macro-financial considerations along the path to liberalization

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  • Yan Carriere-Swallow
  • Pablo Garcia-Silva

Abstract

This paper recounts Chile’s experience with capital account policies since the 1990s. We present how two external shocks were confronted under very different macroeconomic and capital account frameworks. We show that during the 1997-98 Asian-LTCM-Russia crisis, a closed capital account and relatively rigid exchange rate severely constrained the monetary policy response to the shock, aggravating the fall in domestic demand. During the 2008-09 crisis, a full-fledged inflation targeting framework allowed the authorities to implement a significant countercyclical response. We argue that domestic stability considerations lay behind the policy regime switch toward capital account liberalization from 1999 onwards.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/107.

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Length: 32
Date of creation: 14 May 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/107

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Related research

Keywords: Capital account; Chile; Capital account liberalization; Capital controls; Financial crisis; Monetary policy; Inflation targeting; Global Financial Crisis 2008-2009; exchange rate policy; small-open economy; capital inflows; capital account policies; capital markets; capital outflows; hedging; capital flows; capital movements; foreign capital; short-term capital; commodity prices; spot market; capital account restrictions; volatility of capital inflows; composition of capital inflows; equity investments; domestic capital; global capital markets; short-term capital inflows; capital mobility; current account deficit; access to international capital; stock exchange; cost of capital; international capital markets; access to international capital markets; private capital inflows; fixed income securities; bond issues; real appreciation; indexation; floating exchange rate regime; forward contracts; private flows; new york stock exchange; capital gain; equity prices; local capital markets; inflation rate; domestic capital markets; domestic equity; capital transactions; capital contributions;

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References

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  1. Luis Felipe Céspedes & Roberto Chang & Diego Saravia, 2010. "Monetary Policy Under Financial Turbulence: an Overview," Working Papers Central Bank of Chile 594, Central Bank of Chile.
  2. Philip R. Lane & Gian Maria Milesi-Ferretti, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities,1970–2004," The Institute for International Integration Studies Discussion Paper Series iiisdp126, IIIS.
  3. Mauricio Calani C. & Kevin Cowan L. & Pablo García S., 2010. "Inflation Targeting in Financially Stable Economies: Has it been Flexible Enough?," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 13(2), pages 11-50, August.
  4. Edwards, Sebastian & Rigobon, Roberto, 2009. "Capital controls on inflows, exchange rate volatility and external vulnerability," Journal of International Economics, Elsevier, vol. 78(2), pages 256-267, July.
  5. James Tobin, 1978. "A Proposal for International Monetary Reform," Cowles Foundation Discussion Papers 506, Cowles Foundation for Research in Economics, Yale University.
  6. Gianluca Benigno & Huigang Chen & Christopher Otrok & Alessandro Rebucci & Eric R. Young, 2010. "Revisiting Overborrowing and its Policy Implications," Working Papers Central Bank of Chile 582, Central Bank of Chile.
  7. Martin Schindler, 2009. "Measuring Financial Integration: A New Data Set," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 222-238, April.
  8. Emmanuel Farhi & Ivan Werning, 2012. "Dealing with the Trilemma: Optimal Capital Controls with Fixed Exchange Rates," NBER Working Papers 18199, National Bureau of Economic Research, Inc.
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