Chile: a Changed Jungle for the Latin American Tiger
CASE REPORT
Chile: A Changed Jungle For the Latin American Tiger
By:
Beck Cheung
Yingfang Chu
Hang Gu
Sarah Yan
Tian Zeng 2011-11-10
Executive Summary This report first analyzes the economy of Chile in terms of strengths, which are the abundance in natural resources, and the weakness of heavy reliance on copper. Then identified two severe threats the nation was facing in 1998: Asian financial crisis and current account deficit. The two threats interact with the characteristics of Chilean economy which lead to the risks of currency crisis and a economic slowdown. The second section then investigates Chile’s current policies on inflation, trade and exchange rate. In terms of inflation, the central bank uses tight monetary policy and controls on capital inflows such as Unremunerated Reserve Requirement. For trade, the country relies on entering free trade agreements. For foreign exchange policy, Chile maintains a crawling peg system but is increasing the trading band. Facing the current challenges, we recommend that Chile should focus first on solving the potential currency crisis, then the economic slowdown. To avoid a currency crisis, the central bank of Chile should continue the tight monetary policy by raising interest rate. This practice can stabilizes the domestic currency value, attracts international capital and increases domestic savings. Focus directly at reducing current account deficit, Chile should also introduce tax free saving programs and avoid running budget deficit. To address the economic slowdown, Chilean government should use the stabilization fund to stimulate economy and create employment. In long run, the nation needs to reduce dependence on mining by developing manufacturing and technology industries and should continue on entering trade agreements with other countries.
Economy Analysis Chile, which underwent free-market reforms since 1970s,
Chile: A Changed Jungle For the Latin American Tiger
By:
Beck Cheung
Yingfang Chu
Hang Gu
Sarah Yan
Tian Zeng 2011-11-10
Executive Summary This report first analyzes the economy of Chile in terms of strengths, which are the abundance in natural resources, and the weakness of heavy reliance on copper. Then identified two severe threats the nation was facing in 1998: Asian financial crisis and current account deficit. The two threats interact with the characteristics of Chilean economy which lead to the risks of currency crisis and a economic slowdown. The second section then investigates Chile’s current policies on inflation, trade and exchange rate. In terms of inflation, the central bank uses tight monetary policy and controls on capital inflows such as Unremunerated Reserve Requirement. For trade, the country relies on entering free trade agreements. For foreign exchange policy, Chile maintains a crawling peg system but is increasing the trading band. Facing the current challenges, we recommend that Chile should focus first on solving the potential currency crisis, then the economic slowdown. To avoid a currency crisis, the central bank of Chile should continue the tight monetary policy by raising interest rate. This practice can stabilizes the domestic currency value, attracts international capital and increases domestic savings. Focus directly at reducing current account deficit, Chile should also introduce tax free saving programs and avoid running budget deficit. To address the economic slowdown, Chilean government should use the stabilization fund to stimulate economy and create employment. In long run, the nation needs to reduce dependence on mining by developing manufacturing and technology industries and should continue on entering trade agreements with other countries.
Economy Analysis Chile, which underwent free-market reforms since 1970s,