Origins and Resolution of a Banking Crisis: Chile 1982-86

Abstract

Starting in 1981, Chile went into a deep economic and financial crisis. The Chilean solution to the crisis was heterodox in the sense that many policies appear to have been arbitrary, and policy mistakes were made and corrected along the way. However, the economy recovered relatively quickly, and since has built a strong financial sector that allowed the country to avoid the financial turmoil observed during 1995 and 1997-98 in other emerging market economies. This paper reviews and evaluates the Chilean experience of the early 1980s. In particular, it discusses the macroeconomic internal and external environment that led to the banking crisis, and describes in detail the main measures implemented to its resolution. The paper attempts to identify which policies worked and which ones did not. To the extent allowed by the data, we try to see how (and which of) the different policies led to a recovery of the solvency in the banking system.