## Capital Account Liberalization and the Real Exchange Rate in Chile

_IMF Working Papers, June 1, 2005_

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**Canonical URL:** [Capital Account Liberalization and the Real Exchange Rate in Chile](https://www.imf.org/en/publications/wp/issues/2016/12/31/capital-account-liberalization-and-the-real-exchange-rate-in-chile-18083)

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## Bibliographic details
- Published: June 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451861518.001

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### Summary findings
- After the failure of the early 1980s, a second attempt at capital account liberalization was gradually carried out in Chile during the 1990s, this time in parallel with increased exchange rate flexibility.
- Capital account regulations were applied to support the independent monetary policy committed to the inflation target, while the exchange rate was quasi-pegged within a band that targeted the real exchange rate (RER).
- The policy framework directed at stabilizing the RER appears to have been of limited effectiveness, with the surges and sudden-stops in capital flows playing an important role in RER dynamics.
- Foreign exchange market intervention appears not to have affected the RER while reserve requirement appears to have exerted a depreciating effect.
- Government spending and import tariffs appear to be significant tools to moderate the real appreciation, providing one additional reason for adopting a countercyclical fiscal policy and accelerating trade openness.

### Policy implications and recommendations
- Maintain capital account regulations to support independent monetary policy committed to the inflation target in the presence of exchange rate flexibility.
- Recognize that exchange rate quasi-pegging within a band targeting the RER may have limited effectiveness in insulating the RER from capital flow volatility.
- Reassess the role and effectiveness of foreign exchange market intervention, given evidence it did not affect the RER in this context.
- Consider the use of reserve requirements as a tool that may exert a depreciating effect on the RER.
- Use government spending and import tariffs as policy levers to moderate real appreciation, supporting a case for countercyclical fiscal policy and accelerated trade openness.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/capital-account-liberalization-and-the-real-exchange-rate-in-chile-18083_