The Effects of the International Financial Crisis on the Chilean Economy

Abstract

This paper analyzes the effects on Chile of the international financial crisis that started in mid 1997 and evaluates the policies adopted by the economic authorities during 1998 in response to them. The channels of contagion evolved in tandem with the crisis, shifting from trade-related effects (lower international commodity prices) to finance-related consequences (more costly and less available foreign finance). The policy response has been aimed at reducing the current account deficit and making the Chilean economy less vulnerable. The paper concludes that the temporary cost in terms of lower growth is worth paying for, avoiding a surge in domestic inflation and more importantly, reducing the likelihood of a future balance-of-payments crisis, with much higher future employment and output costs.