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This paper recounts Chile’s experience with capital account policies since the 1990s. We present how two external shocks were confronted under very different macroeconomic and capital account frameworks. We show that during the 1997-98 Asian-LTCM-Russia crisis, a closed capital account and relatively rigid exchange rate severely constrained the monetary policy response to the shock, aggravating the fall in domestic demand. During the 2008-09 crisis, a full-fledged inflation targeting framework allowed the authorities to implement a significant countercyclical response. We argue that domestic stability considerations lay behind the policy regime switch toward capital account liberalization from 1999 onwards.

Capital market --- Capital markets --- Market, Capital --- Finance --- Financial institutions --- Loans --- Money market --- Securities --- Crowding out (Economics) --- Efficient market theory --- State supervision --- Deregulation --- Banks and Banking --- Exports and Imports --- Foreign Exchange --- Financial Markets and the Macroeconomy --- Central Banks and Their Policies --- Comparative or Joint Analysis of Fiscal and Monetary Policy --- Stabilization --- Treasury Policy --- International Investment --- Long-term Capital Movements --- Current Account Adjustment --- Short-term Capital Movements --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- International economics --- Currency --- Foreign exchange --- Banking --- Capital account --- Exchange rates --- Capital controls --- Capital inflows --- Balance of payments --- Real exchange rates --- Capital movements --- Banks and banking --- Chile