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El Encaje, los Flujos de Capitales y el Gasto: Una Evaluación empírica

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  • Guillermo Le Fort
  • Sergio Lehmann

Abstract

The rapid expansion of private-sector expenditure in the 1990s was accompanied by a massive and increasing foreign capital inflow. A tight economic policy, characterized by high interest rates, was implemented in order to contain the private expenditure growth. As a way of reconciling high interest rates with increasing international financial integration, a reserve requirement on capital inflows was applied. The paper shows that private spending responds to the volume of capital inflows, and that these, in turn, respond significantly to the reserve requirement. We obtain that the effect of monetary policy on domestic spending is weakened by capital inflows when the exchange rate is not free to fluctuate in response to changes in interest rates. The reserve requirement can be used to avoid this weakening, by compensating the effects on capital inflows produced by interest rate spreads. The results also show that if the reserve requirement had been eliminated, capital inflows would have grown significantly and the excess domestic demand situation of 1997 would have been aggravated. A more effective strategy for controlling private expenditure would have needed a higher reserve requirement and an even tighter monetary policy, or else a counter-cyclical fiscal policy that would have increased public saving in periods of private expenditure expansion.

Suggested Citation

  • Guillermo Le Fort & Sergio Lehmann, 2000. "El Encaje, los Flujos de Capitales y el Gasto: Una Evaluación empírica," Working Papers Central Bank of Chile 64, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:64
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    File URL: http://si2.bcentral.cl/public/pdf/documentos-trabajo/pdf/dtbc64.pdf
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    References listed on IDEAS

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    1. Engel, Eduardo M. R. A. & Galetovic, Alexander & Raddatz, Claudio E., 1999. "Taxes and income distribution in Chile: some unpleasant redistributive arithmetic," Journal of Development Economics, Elsevier, vol. 59(1), pages 155-192, June.
    2. Manuel Agosin & Ricardo French-Davis, 1997. "Managing capital inflows in Chile," Estudios de Economia, University of Chile, Department of Economics, vol. 24(2 Year 19), pages 297-326, December.
    3. Bernard J Laurens & Jaime Cardoso, 1998. "Managing Capital Flows; Lessons From the Experience of Chile," IMF Working Papers 98/168, International Monetary Fund.
    4. Leamer, Edward E, 1983. "Let's Take the Con Out of Econometrics," American Economic Review, American Economic Association, vol. 73(1), pages 31-43, March.
    5. Patricio Rojas & Eduardo López & Susana Jiménez, 1997. "Determinantes del Crecimiento y Estimación del Producto Potencial en Chile: El Rol del Comercio," Working Papers Central Bank of Chile 24, Central Bank of Chile.
    6. Leamer, Edward E, 1985. "Sensitivity Analyses Would Help," American Economic Review, American Economic Association, vol. 75(3), pages 308-313, June.
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    Cited by:

    1. Ffrench-Davis, Ricardo & Larraín, Guillermo, 2003. "How optimal are the extremes?: Latin American exchange rate policies during the Asian crisis," Series Históricas 10, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    2. Guillermo Le Fort V, 2000. "Los Resultados Macroeconómicos del Gobierno de Eduardo Frei RT: Una Evaluación Comparativa," Working Papers Central Bank of Chile 81, Central Bank of Chile.

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