TY - JOUR AU - Cowan, Kevin AU - De Gregorio, Jose TI - International Borrowing, Capital Controls and the Exchange Rate: Lessons from Chile JF - National Bureau of Economic Research Working Paper Series VL - No. 11382 PY - 2005 Y2 - May 2005 DO - 10.3386/w11382 UR - http://www.nber.org/papers/w11382 L1 - http://www.nber.org/papers/w11382.pdf N1 - Author contact info: Kevin Cowan Central Bank of Chile Agustinas 1180 Santiago Chile Tel: (562) 6702192 E-Mail: no email available Jose De Gregorio Professor Departamento de Economia Universidad de Chile Diagonal Paraguay Santiago Chile Tel: 562 9772045 E-Mail: jdegregorio@fen.uchile.cl M1 - published as Kevin Cowan, José De Gregorio. "International Borrowing, Capital Controls, and the Exchange Rate: Lessons from Chile," in Sebastian Edwards, editor, "Capital Controls and Capital Flows in Emerging Economies: Policies, Practices, and Consequences" University of Chicago Press (2007) AB - This paper analyzes the Chilean experience with capital flows. We discuss the role played by capital controls, financial regulations and the exchange rate regime. The focus is on the period after 1990, the period when Chile returned to international capital markets. We also discuss the early 80s, where a currency collapse triggered a financial crisis in Chile, despite stricter capital controls on inflows than the 90s and tighter currency matching requirements on the banking sector. We conclude that financial regulation and the exchange rate regime are at the center of capital inflows experiences and financial vulnerabilities. Rigid exchange rates induce vulnerabilities, which may lead to sharp capital account reversals. We also discuss three important characteristics of the Chilean experience since the 90s. The first is the fact that most international borrowing is done directly by corporations and it is not intermediated by the banking system. The second is the implication of the free trade agreement of Chilean and the US regarding capital controls. Finally, we examine the Chilean experience following the Asian-Russia crisis, showing that Chile did not suffer a sudden-stop, but a current account reversal due to policy reactions and a sudden-start in capital outflows. ER -