Depression and Debt Crisis in Chile

Depression and Debt Crisis in Chile

Abstract

This paper compares and contrasts the Great Depression and the 1980s Debt Crisis in Chile. This study finds that the country experienced incidences of “Sudden Stops” and current account reversals during both crises, where “push” as opposed to “pull” factors serves as the main explanations in both cases. Further, I find that the existing literature on the role of current and capital account opening has been overemphasized when applied to the Chilean cases, as it was rather the absence of an underlying regulatory framework that caused “wildcat” banking during the crises. Lastly, this paper finds that fixed exchange rate regimes had detrimental effects during both crises. ORDER YOUR PAPER NOW

1. Introduction

This paper will compare and contrast the Great Depression and the 1980s Debt Crisis in Chile. [1]  To the author’s knowledge no extensive study has been made comparing the two crises in Chile. [2] I use the Chilean cases to complement the existing literature on “Sudden Stops” and current account reversals, capital and current account opening and the role of fixed exchange rate regimes during financial crises.

I find that the existing literature concerning the Depression has neglected the role of the capital account in exuberating the severity of the crisis in the country. In fact, Chile experienced “Sudden Stops” followed by current account reversals where “push” rather then “pull” factors serves as important part of the explanations. (Eichengreen & Portes, 1989; Braun-Llona et al, 2000; Montiel, 2014) In addition, in the cases of Chile the existing literature has overemphasized the role of current and capital account opening as it was rather the lack of a regulatory framework for the financial sector that caused the “wildcat” banking. (Montiel, 2014; Lane & Milesi-Ferretti, 2006; Ellsworth, 1945) Lastly, during both crises the Bank of Chile was running currency pegs with detrimental effects that exuberated the severity of the crises. (Dornbusch et al, 1995; Behrman, 1976)

This paper will be structured as follows; it will start with an overview of existing literature in the field as well as discussion concerning the methodology. This will be followed by empirical evidence of “Sudden Stops” and current account reversals and a comparative section on the role of current and capital account opening during the crises. Lastly, I will compare the role of exchange rate regimes during the crises followed by concluding remarks. ORDER YOUR PAPER NOW

[1] Henceforth referred to as the “depression” and “debt crisis” for simplicity.

[2] See Dias-Alejandro (1985) for a high level analysis of the Latin American countries during the depression and debt crisis.

2. Literature Review and Methodology

A “sudden stop” has been defined as an abrupt drop in capital inflows during a short period of time in a country that had received large volumes of foreign capital. (Calvo, Izquierdo & Mejia, 2004) Edwards (2007) states that “Sudden Stops” tend to be correlated with current account reversals. The author performs a historical cross-country analysis of incidences of “Sudden Stops” and current account reversals. Of interest to our study, Latin America had the second highest incidence of 25% where a “Sudden Stop” was accompanied by a current account reversal. (Edwards, 2007)

Push and pull factors have been widely discussed in relation to “Sudden Stops”. [1] Push factors refers to instances where conditions in international capital markets, i.e. Incidents in creditor countries are the main drivers of a “Sudden Stop” and reversal of capital flows. Pull factors refers to cases where conditions in the debtor country act as catalyst for “Sudden Stops”. (Forbes & Warnock, 2012) Fratzscher (2012) looked at portfolio flows to over 50 countries during the recent Global Financial Crisis with……Continue Reading

[1] See for example, Cerutti, Claessens & Puy, 2015

 

 

 

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