## Capital Account Policies in Chile Macro-financial considerations along the path to liberalization

_IMF Working Papers, May 14, 2013_

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## Bibliographic details
- Authors: Yan Carriere-Swallow, Pablo Garcia-Silva
- Published: May 14, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484331460.001

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### Summary
- Recounts Chile’s experience with capital account policies since the 1990s.
- Compares how two external shocks were confronted under different macroeconomic and capital account frameworks:
  - 1997-98 Asian-LTCM-Russia crisis: closed capital account and relatively rigid exchange rate constrained the monetary policy response, aggravating the fall in domestic demand.
  - 2008-09 crisis: full-fledged inflation targeting framework allowed authorities to implement a significant countercyclical response.
- Argues that domestic stability considerations underpinned the policy regime switch toward capital account liberalization from 1999 onwards.

### Main findings
- The design of capital account policies and exchange rate frameworks materially affected Chile’s ability to respond to external shocks.
- During the 1997-98 shock:
  - The combination of a closed capital account and a relatively rigid exchange rate "severely constrained the monetary policy response."
  - Constrained policy response "aggravat[ed] the fall in domestic demand."
- During the 2008-09 shock:
  - An inflation targeting framework supported a "significant countercyclical response."
- The shift toward capital account liberalization starting in 1999 is presented as driven by domestic stability considerations.

### Policy implications and recommendations (as presented)
- Macroeconomic framework matters for the effectiveness of capital account policies.
- Flexible macro policy regimes (e.g., inflation targeting) can enhance the capacity to respond countercyclically to external shocks.
- Domestic stability considerations can justify moving toward capital account liberalization when supported by appropriate macroeconomic frameworks.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/capital-account-policies-in-chile-macro-financial-considerations-along-the-path-to-40535_