International Borrowing, Capital Controls, and the Exchange Rate

Kevin Cowan and José De Gregorio

in Capital Controls and Capital Flows in Emerging Economies

Published by University of Chicago Press

Published in print May 2007 | ISBN: 9780226184975
Published online February 2013 | e-ISBN: 9780226184999 | DOI:
International Borrowing, Capital Controls, and the Exchange Rate

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This chapter describes Chile's experience with capital account restrictions and exchange rate policy. Chile did not suffer a sudden stop but a current account reversal due to policy reactions and a “sudden start” in capital outflows. The banks in Chile during the 1990s mediate a relatively low share of international debt inflows. In the years after the capital account was fully liberalized and the exchange rate floated, banks have begun playing a significantly larger role in debt inflows. Those countries with fixed and managed exchange rates are more prone to increases in external debt, and capital controls do not play a significant role in decreasing debt inflows. The Chilean experience was the result of a reversal in the current account, induced primarily by a very tight monetary policy and domestic liquidity squeeze, a sharp decline in terms of trade, and a strong defense of the peso.

Keywords: capital controls; Chile; exchange rate policy; capital outflows; banks; international debt inflows

Chapter.  19809 words.  Illustrated.

Subjects: Macroeconomics and Monetary Economics

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