Testing capital account liberalization without forward rates Another look at Chile 1979–1982

Abstract

The paper offers a way to test the impact of capital account liberalization on domestic interest rates when proxies for expectations of depreciation are unavailable. The model is tested on the well-understood Japanese experience in 1979–1980 and then applied to the Chilean liberalization from 1979–1982. The evidence points to Chilean monetary authorities retaining significant control over interest rates across the period and offers support to an evolving interpretation of the period that stresses the excessive optimism about the reforms, rather than their lack of credibility, as the source of their ultimate collapse.