Macroeconomic and Financial Policy in Chile

Abstract

This chapter considers the internal and external balance issues faced by Chile, a country whose economy has already gone through the most important stages of liberalization and structural reform. It first describes the macro-financial policies implemented and evaluates their success. Inflation has been reduced significantly without sacrificing economic growth. Private saving and the efficiency of its use have been encouraged by reforms of banking and innovations such as the private pension-fund system. A fiscal surplus and external balance have been achieved and maintained. Consistent monetary, fiscal, and exchange-rate policies are being applied, providing the central bank with a high level of credibility.

The country’s excellent economic performance has attracted large amounts of capital that may lead to conflict between providing exchange-and interest-rate stability for the real sector, and the desire to use foreign saving for capital formation, thereby supplementing domestic saving. Chile has managed these conflicts successfully over the past ten years in part through capital-account regulations. But Chilean policymakers also face new tasks: supervision and regulation of international banking activities and the appearance of financial conglomerates are the principal new challenges for the development of a robust, internationally connected financial sector on which the health of the economy critically depends. In addition, low inflation needs to be consolidated by means that may include a greater degree of desindexation.