In the aftermath of the East Asian crises, Chile's experience with capital restrictions invariably serves as Exhibit A for those who argue in favor of capital controls to help reduce financial vulnerability, avoid overborrowing and maintain international competitiveness. Chile's remarkable resilience is instead the result of a prudent macroeconomic policy and a modern and efficient bank-regulatory framework.
Capital controls play at most a minor role.
In mid-1991, in the midst of a dramatic surge in capital inflows, Chile implemented a scheme aimed at restricting the mobility of capital into the country. The Chilean authorities hoped that this scheme would result in a reduction in the aggregate volume of capital inflows, as well as in a shift in maturity toward longer-term commitments. These two effects would, in turn, help achieve three fundamental objectives. First, the extent of real exchange rate appreciation associated with any surge of capital inflows would be controlled. Second, under capital controls high domestic interest rates could be used as the fundamental anti-inflationary tool.