A Review of Capital Account Restrictions in Chile in the 1990s

Abstract

This paper examines the Chilean experience with capital controls and reviews studies on controls on capital inflows. Controls on Chile`s inflows had only a temporary impact in reducing specific inflows because they were affected by avoidance. There is some evidence that controls increased interest rates and altered the composition of capital inflows. The studies, however, contain important methodological problems in measuring flows and significant econometric weaknesses, which cast doubt on the robustness of the estimates. No study has assessed the political economy of the controls. It seems premature to view the Chilean experience as supportive of controls on capital inflows.

Keywords: Capital controls, interest rates and exchange rates, monetary policy

JEL Classification: F32, F21, E58