ABSTRACT
In 1982, the world economy was rocked by financial crises in most developing countries. Capital flows from private banks to developing countries ended suddenly, causing exchange rates to collapse and economies to fall into deep recession throughout Africa, Asia, and Latin America. Chile’s per capita gross domestic product (GDP) fell by 18 percent after the Chilean peso lost about half its value and many heavily indebted domestic firms and banks went bankrupt. Ironically, Chile had recently been praised for its government’s budget surplus. But the collapsing exchange rate’s eect on Chile’s private foreign debt proved to be as devastating as similar currency collapses were on foreign government debt elsewhere in Latin America. The cause of each of these economic crises was a large change in exchange rates caused by sudden shifts in international financial flows. These shifts were the result of monetary policy decisions in the United States, the United Kingdom, and elsewhere, but the losses in income and employment were felt in many of the world’s developing economies.
