Capital Controls in Chile in the 1990s (A) Harvard Case Solution & Analysis

In 1991, Chile adopted a framework of capital controls aimed at reducing the massive flows of foreign investment coming into the country international interest rates have remained low. Capital inflows are threatening the ability of the central bank to manage the exchange rate within a crawling band, which aims ultimately to reduce the rate of inflation in Chile and internationally. Prior to the Asian financial crisis of 1997 and the Russian debt crisis in August 1998, the Chilean economy has performed spectacularly in, or perhaps in spite of these controls. In the period after the Asian and Russian crises, Chile's economy began to suffer both through trade and financial channels. Current account deteriorated in Chile, not only because Chile relied on Asia as a market for a third of its exports, but also the price of copper, Chile's biggest export product, fell in the face of demand reduction in Asia. Financial flows to Chile, as well as in the emerging markets as a whole, fell sharply as investors panicked. By the end of 1999, Chile experienced the worst in Latin America "sudden stop" of external capital flows. In this new economic environment, Chile was forced to review its system of capital controls. Many observers in the private sector too has accused the control add to the deformation and demanded control removed completely. Meanwhile, the Central Bank of Chile continues to protect management and argued that they helped protect the country worse than the plague. "Hide
by Laura Alfaro, Rafael Di Tella, Ingrid Vogel Source: Harvard Business School 27 pages. Publication Date: Mar 08, 2005. Prod. #: 705031-PDF-ENG

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