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Review Essay: Is a Chilean-Style Tax on Short-Term Capital Inflows Stabilizing?

Research paper by Michael K. Ulan

Indexed on: 01 Apr '00Published on: 01 Apr '00Published in: Open Economies Review



Abstract

In the wake of the 1997–1998 East Asian financial crisis, some economists recommended that affected countries adopt a Chilean-style tax on short-term capital inflows to maintain domestic macroeconomic stability. In Chile, the tax reduced capital inflows lengthened the maturity of inflows, and maintained interest rates at levels designed to avoid overheating—but not costlessly. Aside from second-best arguments, such a tax is justified as a temporary measure to buy time to reform and introduce prudential regulation and supervision of a country's financial system. Would dirigiste economies use the tax to facilitate reforms and remove it after effecting prudential regulation?