Managing Capital Flows: Lessons From the Experience of Chile

IMF Working Papers, December 1, 1998

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As a result of the Asian crisis, methods of coping with volatile international capital markets have received considerable attention from observers and policymakers.
It has been argued that the imposition by Chile of a nonremunerated reserve requirement on external borrowing played a useful role in the smooth liberalization of its capital account by allowing Chile to deal effectively with short-term capital inflows and thus to reduce its vulnerability to external shocks, and that such measures should be adopted by other countries.
This paper reviews Chile’s experience in managing capital flows and draws lessons for policymakers.

Chile used a nonremunerated reserve requirement on external borrowing as a policy tool during capital account liberalization.
The measure helped manage short-term capital inflows and reduced vulnerability to external shocks.
The Chilean experience is presented as a potential model for other countries facing volatile international capital markets.

Nonremunerated reserve requirements can play a useful role in smoothing capital account liberalization.
Such measures may help countries deal effectively with short-term capital inflows.
Policymakers should consider reserve requirement-type instruments as part of a broader strategy to reduce vulnerability to external shocks during capital account liberalization.

Subject: Balance of payments, Capital controls, Capital flows, Capital inflows, Exchange rates, Foreign exchange, Monetary policy, Reserve requirements
Keywords: capital, capital controls, Capital flows, capital inflows, Chile, contagion, control, exchange rate band, Exchange rates, indexation mechanism, interest rate, interest rate differential, monetary policy, prudential framework, RER appreciation, Reserve requirements, WP

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

IMF Working Paper No. 1998/168

Managing Capital Flows: Lessons from the Experience of Chile - WP/98/168
- Managing Capital Flows: Lessons from the Experience of Chile - WP/98/168 (Markdown version)
- Managing Capital Flows: Lessons from the Experience of Chile - WP/98/168 (PDF)