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A) resilience of the Chilean economy during the 90s was mainly due to: (i) changes in banking regulation

that promoted a solid financial system (in particular changes in regulation for related lending) and, (ii) to the absence of currency risk guarantees to the private sector

B) In 1998 the Chilean peso suffered three rounds of speculative attacks. These turbulences were fought off with large hikes in interest rates and massive intervention in the foreign exchange market. As a result of this intervention, and a series of negative external shocks, in 1999 the economy suffered its first recession in many years. However, the fall in output was small in comparison to other countries that also experienced sudden stops in capital inflows in the late 90s. Furthermore, Chile in 1999 did not face a financial crisis. This has led many observers to argue that the presence of the encaje reduced Chiles external vulnerability and was central to the mild recession. After all, it reduced the share of short-term debt, a variable that many authors have singled out as an important source of financial vulnerability10 . The problem with this view is that the magnitude of the estimated effects of the encaje on the level and composition of capital flows during the 90s make it hard to believe that capital controls were central to Chiles economic success during the nineties. Furthermore, Chiles experience in the early 80s shows that, even if capital controls are effective in limiting the share of short term debt, this certainly does not provide a guarantee against currency crises. The Chilean 1982 crisis was a full-blown twin crisis (currency and financial). Starting from a closed capital account, legislation passed early in 1974 allowed Chilean non-financial firms and individuals to borrow abroad. However, inflows were restricted to

maturities greater than 6 months. In April 1976, and concerned with the destabilizing effects of short-term capital inflows, Chilean authorities further lengthened this minimum maturity to two years. The minimum maturity restriction was to stay in place up to the debt crisis in 1982. In 1979 an additional restriction on short debt was introduced: an unremunerated reserve requirement (an encaje) was put in place on all foreign loans shorter than 65 months.11 As a result of these stringent controls, short-term debt in 1981 was only 19% of total debt. This did not prevent a severe crisis, however, with output declines of 13.6% in 1982 and 2.8% in 1983.