Testing Capital Account Liberalization Without Forward Rates: Another Look at Chile 1979-82
Journal of Development Economics, Vol. 52, No. 1, February 1997
Posted: 5 Jun 1997
NOTE: This is a description of the paper and is not the actual abstract.
In the absence of forward rates, testing for the impact of capital account liberalization measures using tests of covered interest parity is not feasible. This paper argues that additional information can be gained by following the behavior of domestic determinants of interest rates instead. A model of domestic interest rate determination during liberalization is first tested on the well understood Japanese experience from 1979-80, and strong evidence of increased integration is found. It is then applied to the Chilean liberalization from 1979-82. Counter to the standard view, no evidence for increased integration is found, and domestic factors, such as high credit demand and contractionary monetary policies, are more likely to have driven the high real interest rates across the period than expectations of depreciation. This finding offers support to an alternate interpretation of the Chilean collapse in 1982 that focuses on the excessive optimism about the reforms, rather than their lack of credibility.
JEL Classification: E31, E43
Suggested Citation: Suggested Citation