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Capital Account Regulations and Macroeconomic Policy: Two Latin American Experiences

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  • Guillermo Le Fort V.

    (The Jerome Levy Economics Institute)

  • Carlos Budnevich L.

    (The Jerome Levy Economics Institute)

Abstract

A resurgence of perceived opportunities by international investors has resulted in a new policy debate regarding the regulation of capital flows into certain South American countries. The integrationist camp defends totally open markets on the grounds that they result in a more efficient financial sector, greater asset diversification, and other benefits, while those in the isolationist camp support regulating capital inflows on the grounds that they generate macroeconomic instability and reduce the effectiveness of monetary policy. Noting that there are both costs and benefits associated with external capital flows, Guillermo Le Fort V., international director of the Central Bank of Chile, and Carlos Budnevich L., manager of financial analysis for the Central Bank of Chile, argue against both extremes, opting instead for a policy falling somewhere between the two. An intermediate policy of gradual and limited financial integration has been adopted in Chile and Colombia, two countries experiencing capital account surpluses. Le Fort and Budnevich examine the macroeconomic and financial results during the 1990s of the countries' policies regarding external capital accounts. In the early 1980s the Chilean financial system was wracked by insolvency that was deepened by recession. By 1983 volatile international capital inflows, resulting from the removal of restrictions to such flows, had precipated a widespread crisis. Having weathered this experience, Chile's financial institutions are cautious and concerned about maintaining moderate current account deficits. Policies to accomplish this goal include a targeted range for the medium-term current account deficit, foreign exchange market and capital account regulations, and a limit to the degree of integration of external and domestic markets. The authors note, however, that the reserve requirement cannot stem currency appreciation, which has averaged about 4 percent per year. They also conclude that capital account regulations have not impaired the financial system. "In fact, despite the regulations, the financial system and the capital markets have achieved very significant development in Chile over the past few years."

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 9807003.

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Length: 46 pages
Date of creation: 16 Jul 1998
Date of revision:
Handle: RePEc:wpa:wuwpma:9807003

Note: Type of Document - Acrobat PDF; prepared on IBM PC - PC; to print on PostScript; pages: 46; figures: included
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  1. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
  2. Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America," IMF Working Papers 92/62, International Monetary Fund.
  3. Ffrench-Davis, Ricardo, 1990. "Debt-Equity Swaps in Chile," Cambridge Journal of Economics, Oxford University Press, vol. 14(1), pages 109-26, March.
  4. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-53, February.
  5. Kouri, Pentti J K & Porter, Michael G, 1974. "International Capital Flows and Portfolio Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 443-67, May/June.
  6. José Darío Uribe, 1995. "Flujos de Capital en Colombia: 1978-1994," BORRADORES DE ECONOMIA 002733, BANCO DE LA REPÚBLICA.
  7. Razin, Assaf & Sadka, Efraim, 1991. "Efficient investment incentives in the presence of capital flight," Journal of International Economics, Elsevier, vol. 31(1-2), pages 171-181, August.
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Cited by:
  1. Michael Ulan, 2000. "Review Essay: Is a Chilean-Style Tax on Short-Term Capital Inflows Stabilizing?," Open Economies Review, Springer, vol. 11(2), pages 149-177, April.
  2. Raúl Labán & Felipe Larraín, 1997. "El Retorno de los Capitales Privados a Chile en los Noventa: Causas, Efectos y Reacciones de Política," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 34(103), pages 339-362.
  3. Dani Rodrik & Andres Velasco, 1999. "Short-Term Capital Flows," NBER Working Papers 7364, National Bureau of Economic Research, Inc.
  4. Sebastian Edwards, 1998. "Capital Flows, Real Exchange Rates, and Capital Controls: Some Latin American Experiences," NBER Working Papers 6800, National Bureau of Economic Research, Inc.
  5. Sebastian Edwards, 1998. "Capital Inflows into Latin America: A Stop-Go Story?," NBER Working Papers 6441, National Bureau of Economic Research, Inc.

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