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Capital account liberalization - orderly, properly sequence, and befitting the individual circumstances of countries- is an inevitable step for all countries wishing to realize the benefits of the globalized economy. This paper reviews the theories behind capital account liberalization and examines the dangers associated with free capital flows. The authors conclude that the dangers can be limited through a combination of sound macroeconomic and prudential policies.
"Writings on the macroeconomic impact of capital account liberalization find few, if any, robust effects of liberalization on real variables. In contrast to the prevailing wisdom, I argue that the textbook theory of liberalization holds up quite well to a critical reading of this literature. The lion's share of papers that find no effect of liberalization on real variables tell us nothing about the empirical validity of the theory, because they do not really test it. This paper explains why it is that most studies do not really address the theory they set out to test. It also discusses what is necessary to test the theory and examines papers that have done so. Studies that actually test the theory show that liberalization has significant effects on the cost of capital, investment, and economic growth"--National Bureau of Economic Research web site.
This paper examines issues in sequencing and pacing capital account liberalization and draws lessons from experience in four countries (Chile, Indonesia, Korea, and Thailand). The paper focuses on the interrelationship between capital account liberalization, domestic financial sector reforms, and the design of monetary and exchange rate policy. It concludes that capital account liberalization should be approached as an integrated part of comprehensive reform strategies and should be paced with the implementation of appropriate macroeconomic and exchange rate policies.
This paper presents a theoretical and empirical analysis of policies aimed at setting a more depreciated level of the real exchange rate. An intertemporal optimizing model suggests that, in the absence of changes in fiscal policy, a more depreciated level of the real exchange can only be attained temporarily. This can be achieved by means of higher inflation and/or higher real interest rates, depending on the degree of capital mobility. Evidence for Brazil, Chile, and Colombia supports the model’s prediction that undervalued real exchange rates are associated with higher inflation.
The essays collected in this volume discuss the impact of increased capital mobility on macroeconomic performance.
Originally published in 1991, Financial Market Liberalization in Chile, 1973-1982, analyses the liberalization of the financial market which took place during the 1973-1982 monetarist experiment. The book addresses the effect this had on the Chilean economy and how this affected effects of the behaviour of the firms which went bankrupt during this period. The book also presents a description of the policies implemented in the Chilean economy during this period and examines the impact that this had on the performance of the financial sector.
After the failure of the early 1980s, a second attempt at capital account liberalization was gradually carried out in Chile during the 1990s, this time in parallel with increased exchange rate flexibility. Capital account regulations were applied to support the independent monetary policy committed to the inflation target, while the exchange rate was quasi-pegged within a band that targeted the real exchange rate (RER). Still, the policy framework directed at stabilizing the RER appears to have been of limited effectiveness, with the surges and sudden-stops in capital flows playing an important role in RER dynamics. Foreign exchange market intervention appears not to have affected the RER while reserve requirement appears to have exerted a depreciating effect. Government spending and import tariffs, appear to be significant tools to moderate the real appreciation thus providing one additional reason for adopting a countercyclical fiscal policy and accelerating trade openness