Lessons to be learned: Actual motives behind capital controls: Keep a check on inflation Control the foreign inflows i.

i.e reduce short term flows which are volatile and i ncrease the share of long term capital flow which are stable and help economy in long term Keep the exchange rate in limits i.e do not let the peso to appreciate to higher levels so as not loose competitiveness in market To let central bank pursue an independent monitory policy What are the results? They could achieve reduction in short term capital flows only for short time but investors are able to find other ways of investing in chile through different r outes Debt to foreign countries continued to rise around 17billions in 1991 to around 23billion in 1997 They could not cut the real appreciation of the peso and real exchange rate inde x continued to rise to around 95 in 1998 from 115 during 1990s They were able to keep the inflation in controlled levels Problems with the implemented capital controls that can teach us some lessons: Without proper implementation plan with long term strategy behind it, even a wel l intended idea may not give the desired results. Capital controls may help in restricting the slide in short term but there is al ways a need to attain strong fundamental macroeconomic growth drivers of the eco nomy to survive in long term. coverage of URR is restricted to only some type of investments that always gave room for investors to find loop holes and find other ways of investing ex: Initi ally URR covered 50% of inflows and later it became around 30%then they had to i nclude some other type of inflows to improve the coverage of inflows by URR, tra de credits acted as substitute for short term investments Implementation of URR is done in phases to overcome the existing limitations. It suggests investors will always find a ways to evade the capital restrictions Ex: Initially required URR is 20% and later increased to 30% They got benefits only for short term i.e just for 1year after implementing the rules then after the same old situation continued as they found ways to evade th e existing rules and Chile again has to come up with some extensions to the poli cies and this goes on. I.e it leads to finding ways of evading them in long ter m URR only on short term not on FDIs so capital still continued to flow that lead to appreciation of currency Cost of URR is compensated by currency appreciation that attracted the investors liberalization of outflows may signal financial stability and may sometimes incr ease the inflows In long term people may find ways to evade URR. So fundamental macroeconomic fac tors have to be strengthened to build harmony in the economy of the country. Reduction in net inflow may be due to other factors other than URR due to outflo w liberalization, pre-payment of government debts etc The co-existence of two policies at same time i.e controls and target zone make it difficult to determine if the changes in exchange rate volatility are due to controls or other When there is an active exchange rate management policy, it is not possible to e valuate the effectiveness of capital controls by analysing the co-movement betwe en the observed exchange rate and external shocks. In this case, simple estimate s are likely to capture the combination of both the controls and the active exch ange rate policies. Without a clear model of how exchange rate (or monetary) pol icy is conducted, we cannot clearly conclude the effectiveness of the policy ado pted by Chile