La Política Monetaria, el Tipo de Cambio Real y el Encaje al Influjo de Capitales: Un Modelo Analítico Simple

This paper presents a simple model based on several equilibrium relationships between the real exchange rate —the relative price of tradable and non tradable goods— and monetary policy, represented by the real interest rate. The domestic equilibrium represents the real exchange rate response directed at eliminating any excess demand in the goods market; the external equilibrium represents the real exchange rate response directed at maintaining a sustainable current account deficit; meanwhile the financial arbitrage condition represents the response that ensures that the expected return of financial capital is the same in domestic and foreign currency. There is only one real interest rate level and one real exchange rate level compatible with global equilibrium; without international capital mobility, monetary policy is fully autonomous to reach this global equilibrium position. The global equilibrium position can be modified by fiscal policy, particularly allowing the equilibrium to be attained at different levels of the real interest rate. Under full international capital mobility, monetary policy effectiveness is limited and a more flexible fiscal policy, that limits the impact of shocks on the equilibrium interest rate, or a reserve requirement on capital flows, that increases the operational range of monetary policy, is needed to preserve global equilibrium. Without them it will be necessary to take as given the external current account deficit levels that international financial markets are willing to accept, and these level can be extremely volatile, moving from the amplitude and easiness that allows for large expansions in domestic expenditure to the tough restrictions that require severe adjustments.

Business Cycle Dynamics and Shock Resilience in Chile

In this paper we use a VAR model to analyze the response of the Chilean business cycle to shocks and the capacity of the Chilean economy to withstand them (resilience). Novel features in the analysis include the introduction of an expanded set of variables to capture the impact of external shocks and domestic shocks —including policy variables; the use of an extended sample since the 1950s; and the introduction of block exogeneity to capture the small open economy feature and to better deal with identification issues. Among key results, we find that foreign shocks have been the dominant source of business cycle fluctuations, followed by monetary policy shocks, while fiscal policy shocks explain relatively little; and that despite of the increased synchronization of the domestic business cycle with international conditions, the resilience of the Chilean economy to external shocks has increased during the nineties, with countercyclical policies playing an important role in such a positive development

Los Resultados Macroeconómicos del Gobierno de Eduardo Frei RT: Una Evaluación Comparativa

This study undertakes a balance of the macroeconomic results of the Frei Ruiz-Tagle Administration compared with other Chilean administrations from the last third of the 20th century and with a group of emerging economies. In both comparisons, the Frei RT Administration enjoys among the best results according to the macroeconomic performance indicator constructed. Its principal strengths included control of inflation, economic growth, capital formation and savings, while its relative weaknesses were export growth and the unemployment rate. The results varied over time since contagion from the Asian crisis resulted in a weakening of overall performance. This experience demonstrates that, to prevent contagion from external crises, it is not sufficient to maintain a healthy financial system and low and stable inflation. Vulnerability to contagion can result from an excessive expansion in private expenditure, which presents a pending challenge to develop adequate instruments to confront this.

El Encaje, los Flujos de Capitales y el Gasto: Una Evaluación empírica

The rapid expansion of private-sector expenditure in the 1990s was accompanied by a massive and increasing foreign capital inflow. A tight economic policy, characterized by high interest rates, was implemented in order to contain the private expenditure growth. As a way of reconciling high interest rates with increasing international financial integration, a reserve requirement on capital inflows was applied. The paper shows that private spending responds to the volume of capital inflows, and that these, in turn, respond significantly to the reserve requirement. We obtain that the effect of monetary policy on domestic spending is weakened by capital inflows when the exchange rate is not free to fluctuate in response to changes in interest rates. The reserve requirement can be used to avoid this weakening, by compensating the effects on capital inflows produced by interest rate spreads. The results also show that if the reserve requirement had been eliminated, capital inflows would have grown significantly and the excess domestic demand situation of 1997 would have been aggravated. A more effective strategy for controlling private expenditure would have needed a higher reserve requirement and an even tighter monetary policy, or else a counter-cyclical fiscal policy that would have increased public saving in periods of private expenditure expansion.

Cuenta Corriente y Desvíos Transitorios en Términos de Intercambio y Volúmenes de Exportaciones: Chile 1985-1999

To limit the risks of a sudden stop in external financing that would jeopardize intertemporal consumption smoothing, the current account deficit should be limited to sustainable levels. However, the volatility of the terms of trade and some export volumes cause difficulties in assessing a sustainable current account level. This paper provides a "trend indicator" for the current account based on "normalized" external prices and export volumes. Thus, the exercise allows evaluating, in a simple and timely fashion, whether the deficit level is sustainable and, if not, demand adjustment measures are needed to correct it.

El Tipo de Cambio Real y la Experiencia de los Países del Cono Sur 1974-1982

This paper studies the real exchange rate experience of the Southern cone countries during the late seventies and early eighties, and the explanations given to the sharp real appreciation of their currencies that generated a deep crisis in their traded go

La Dinámica de Ajuste del Tipo de Cambio Real y la Tasa de Interés Real luego de una Devaluación

An economy under a fundamental disequilibrium in the balance of payments must reallocate resources to the production of internationally traded goods. The adjustment could be produced by a devaluation of the domestic currency or by a contraction in spendin

La Devaluación Esperada: Una Aproximación Bayesiana

The purpose of this article is to develop a methodology for estimating an expected devaluation series in an economy with fixed or adjustable exchange rate policies. A measure for the degree of confidence in the pre-announced exchange rate is estimated usi

Capital Account Regulations and Macroeconomic Policy: Two Latin American Experiences

A resurgence of perceived opportunities by international investors has resulted in a new policy debate regarding the regulation of capital flows into certain South American countries. The integrationist camp defends totally open markets on the grounds that they result in a more efficient financial sector, greater asset diversification, and other benefits, while those in the isolationist camp support regulating capital inflows on the grounds that they generate macroeconomic instability and reduce the effectiveness of monetary policy. Noting that there are both costs and benefits associated with external capital flows, Guillermo Le Fort V., international director of the Central Bank of Chile, and Carlos Budnevich L., manager of financial analysis for the Central Bank of Chile, argue against both extremes, opting instead for a policy falling somewhere between the two. An intermediate policy of gradual and limited financial integration has been adopted in Chile and Colombia, two countries experiencing capital account surpluses. Le Fort and Budnevich examine the macroeconomic and financial results during the 1990s of the countries' policies regarding external capital accounts. In the early 1980s the Chilean financial system was wracked by insolvency that was deepened by recession. By 1983 volatile international capital inflows, resulting from the removal of restrictions to such flows, had precipated a widespread crisis. Having weathered this experience, Chile's financial institutions are cautious and concerned about maintaining moderate current account deficits. Policies to accomplish this goal include a targeted range for the medium-term current account deficit, foreign exchange market and capital account regulations, and a limit to the degree of integration of external and domestic markets. The authors note, however, that the reserve requirement cannot stem currency appreciation, which has averaged about 4 percent per year. They also conclude that capital account regulations have not impaired the financial system. "In fact, despite the regulations, the financial system and the capital markets have achieved very significant development in Chile over the past few years."