The Case of Chile
WORKING PAPER The Case of Chile Rodrigo Caputo and Diego Saravia JANUARY 2019 A Program of 1126 E. 59th St, Chicago, IL 60637 Main: 773.702.5599 bfi.uchicago.edu The Monetary and Fiscal History of Chile, 1960–2016 Rodrigo Caputo Diego Saravia CESS, Oxford University-USACH Central Bank of Chile Abstract Chile has experienced deep structural changes in the last fifty years. In the 1970s, a massive increase in government spending, not financed by an increase in taxes or debt, induced high and unpredictable inflation. Price stability was achieved in the early 1980s after a fixed exchange rate regime was adopted. This regime, however, generated a sharp real exchange rate appreciation that exacerbated the external imbalances of the economy. The regime was abandoned and nominal devaluations took place. This generated the collapse of the financial system, which had to be rescued by the government. There was no debt default, but in order to service the public debt, the fiscal authority had to generate surpluses. Since 1990, this was a systematic policy followed by almost all administrations and helped to achieve two different but related goals. It contributed to reducing the fiscal debt and enabled the central bank to pursue an independent monetary policy aimed at reducing inflation. We are grateful to Jorge Alamos, Luis Felipe Céspedes, Jos´e D´ıaz, Pablo Garc´ıa, Alfonso Irarr´azabal, Jos´e Matus, Juan Pablo Medina, Juan Pablo Nicolini, Eric Parrado, Claudio Soto, Jaime Troncoso, Rodrigo Valdés, Gert Wagner, and seminar participants at the Central Bank of Chile, the University of Chicago, the University of Barcelona, LACEA 2017, the BFI–University of Chicago 2017 Conference, the BFI–Central Bank of Chile 2008 Conference, and the BFI–IDB Conference in 2008 for helpful comments and discussions.
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