Review Essay: Is a Chilean-Style Tax on Short-Term Capital Inflows Stabilizing?
In the wake of the 1997â€“1998 East Asian financial crisis, some economists recommended that affected countries adopt a Chilean-style tax on short-term capital inflows to maintain domestic macroeconomic stability. In Chile, the tax reduced capital inflows lengthened the maturity of inflows, and maintained interest rates at levels designed to avoid overheatingâ€”but not costlessly. Aside from second-best arguments, such a tax is justified as a temporary measure to buy time to reform and introduce prudential regulation and supervision of a country's financial system. Would dirigiste economies use the tax to facilitate reforms and remove it after effecting prudential regulation? Copyright Kluwer Academic Publishers 2000
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