The Fiscal and Monetary History of Chile 1960-2010

April 2014
Rodrigo Caputo, Diego Saravia

Chile experienced deep structural changes. In the early 1970s a massive increase in government spending, which was not financed by an increase in taxes or debt, induced high an unpredictable inflation. Price stability was achieved in the early 1980s, after a fixed exchange rate regime was adopted. This regime, however, induced a sharp real exchange rate appreciation that exacerbate the external imbalances. The regime was abandoned and nominal devaluations took place. This generated the collapse of the financial system, that had to be rescued by the government. There was no debt default, but in order to service the public debt, the fiscal authority had to generate surpluses. Since 1987, this was a systematic policy followed by all administrations, and helped achieving two different, but related, goals. It contributed to reducing the fiscal debt and enabled the central bank to pursue and independent monetary policy aimed at reducing inflation.