ABSTRACT
This chapter concentrates on capital flows and exchange rate policies in Chile, principally in the 1990s, but some reference will be made to the 1980s debt crisis because of the huge impact it had in Chile. It measures capital flows and their composition, and domestic absorption. The chapter considers the social and economic effects of those policies. It focuses on general policy lessons in key policy areas and looks to their implications for the near future. The Chilean authorities opted to regulate the foreign exchange market in order to prevent large misalignments in the real exchange rate relative to its long-term trend. The chapter discusses that FDI is considerably less volatile than other kinds of capital inflows, and that it is worthwhile to target policies of macroeconomic prudential management, such as the reserve requirement, on short term capital inflows. It discusses briefly some recurrent issues which have significant implications for the design of macroeconomic policies and the capital account.
