ABSTRACT
This chapter describes the evolution of capital flows to Latin America after the Russian crisis and the countries’ response via current account adjustments. Massive capital inflows that set sail to Latin America in the early 1990s, financing high growth rates and large current account deficits, came all of a sudden to a standstill following Russia’s partial foreign debt repudiation in August 1998. It was a real challenge for analysts to imagine how a crisis in a country with little if any financial or trading ties to Latin America could have such profound effects on the region. The expansion of the target zone in Colombia had reduced pressure on interest rates, but the announcement of flotation with inflation targeting led to a further reduction in interest rates. The chapter explores the consequences of sudden stops on real exchange rate realignment and focuses on exchange rate responses after the capital flow standstill.
