Working Paper: NBER ID: w11382
Authors: Kevin Cowan; José De Gregorio
Abstract: This paper analyzes the Chilean experience with capital flows. We discuss the role played by capital controls, financial regulations and the exchange rate regime. The focus is on the period after 1990, the period when Chile returned to international capital markets. We also discuss the early 80s, where a currency collapse triggered a financial crisis in Chile, despite stricter capital controls on inflows than the 90s and tighter currency matching requirements on the banking sector. We conclude that financial regulation and the exchange rate regime are at the center of capital inflows experiences and financial vulnerabilities. Rigid exchange rates induce vulnerabilities, which may lead to sharp capital account reversals. We also discuss three important characteristics of the Chilean experience since the 90s. The first is the fact that most international borrowing is done directly by corporations and it is not intermediated by the banking system. The second is the implication of the free trade agreement of Chilean and the US regarding capital controls. Finally, we examine the Chilean experience following the Asian-Russia crisis, showing that Chile did not suffer a sudden-stop, but a current account reversal due to policy reactions and a sudden-start in capital outflows.
Keywords: International Borrowing; Capital Controls; Exchange Rate; Chile
JEL Codes: E51; F31; F32; F34; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| changes in banking regulation (G28) | resilience of the Chilean economy during the 90s (O54) |
| absence of currency risk guarantees (F31) | resilience of the Chilean economy during the 90s (O54) |
| changes in banking regulation (G28) | prudent indebtedness policies among corporations (G32) |
| prudent indebtedness policies among corporations (G32) | better tolerance of exchange rate fluctuations (F31) |
| rigid exchange rate system (F33) | capital inflows (F21) |
| capital controls (F38) | composition of capital inflows (F21) |