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Capital Account Regulations and Macroeconomic Policy: Two Latin American Experiences

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  • Guillermo Le Fort
  • Carlos Budnevich

Abstract

The regulations that limit international financial integration have been at the center of a recent policy debate. Any developing economy can benefit from financial development, but international financial integration implies the risk of macroeconomic instability. The approach that has been favored in Chile and Colombia is one of gradual and limited financial integration, attempting to increase the effectiveness of monetary and exchange rate policies. The reduction in the risk premiurn demanded by investors has created downward pressure on domestic real interest rates, however a lower interest rate would increase domestic expenditure, the price level and the current account deficit. Among the policies put into effect to deal with this problem are increasing exchange rate flexibility and taxing external financing. Both countries have registered a successful macroeconomic performance, with the success partly owing to effective capital account regulation. The effectiveness of the regulations is shown in that a once and for all currency appreciation followed by a depreciating trend has been avoided, and that the current account deficit has been kept at sustainable levels. In other words, capital account regulations have avoided the overshooting (over appreciation) of the real exchange rate that would have occurred with large amounts of short term capital inflows. Using stronger restrictions on capital flows, quantitative limits for example, would not only create very significant microeconomic costs and slow economic and financial developments, but also most likely would be ineffective.
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  • Guillermo Le Fort & Carlos Budnevich, 1996. "Capital Account Regulations and Macroeconomic Policy: Two Latin American Experiences," Economics Working Paper Archive wp_162, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_162
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    References listed on IDEAS

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    1. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
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    Cited by:

    1. Chokri Zehri, 2022. "Conditions for the success of capital controls: The elasticity approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 893-910, January.
    2. Mr. Bernard J Laurens & Mr. Jaime Cardoso, 1998. "Managing Capital Flows: Lessons From the Experience of Chile," IMF Working Papers 1998/168, International Monetary Fund.
    3. Wenwen Sheng & M. C. Sunny Wong, 2017. "Capital Flow Management Policies and Riskiness of External Liability Structures: the Role of Local Financial Markets," Open Economies Review, Springer, vol. 28(3), pages 461-498, July.
    4. Sebastian Edwards, 2000. "Capital Flows, Real Exchange Rates, and Capital Controls: Some Latin American Experiences," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 197-246, National Bureau of Economic Research, Inc.
    5. 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.
    6. Islam, Roumeen, 2000. "Should capital flows be regulated? - a look at the issues and policies," Policy Research Working Paper Series 2293, The World Bank.
    7. Sebastian Edwards, 1998. "Capital Inflows into Latin America: A Stop-Go Story?," NBER Working Papers 6441, National Bureau of Economic Research, Inc.
    8. 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.
    9. Dani Rodrik & Andres Velasco, 1999. "Short-Term Capital Flows," NBER Working Papers 7364, National Bureau of Economic Research, Inc.
    10. Michael K. Ulan, 2002. "Should Developing Countries Restrict Capital Inflows?," The ANNALS of the American Academy of Political and Social Science, , vol. 579(1), pages 249-260, January.

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