Capital Account Regulations and Macroeconomic Policy

A resurgence of perceived opportunities by international investors has resulted in a new policy debate
regarding the regulation of capital flows into certain South American countries. The integrationist camp
defends totally open markets on the grounds that they result in a more efficient financial sector, greater asset
diversification, and other benefits; those in the isolationist camp support regulating capital inflows on the
grounds that they generate macroeconomic instability and reduce the effectiveness of monetary policy. Noting
that there are both costs and benefits associated with external capital flows, Guillermo Le Fort, international
director of the Central Bank of Chile, and Carlos Budnevich, manager of financial analysis for the Central
Bank of Chile, argue against both extremes, opting instead for a policy falling somewhere between the two.
An intermediate policy of gradual and limited financial integration has been adopted in Chile and Colombia,
two countries experiencing capital account surpluses. Le Fort and Budnevich examine the macroeconomic and
financial results during the 1990s of the countries’ policies regarding external capital accounts.