This is another reason to make these interventions only in exceptional circumstances. Controls on capital inflows If capital inflows are believed to cause trouble, one solution is to limit them by applying controls. This can be done in economies whose financial systems are not well-developed. As the economy and its financial systems develop, limiting capitals becomes more complex and ineffective, in particular due to difficulties in discriminating which types of flows should be curtailed. Also, in economies with high levels of international assets such as Chile, it is difficult to control capital inflows because of the need to distinguish between inflows by nonresidents and repatriation of capital by residents. In the 1990s, before adopting the current monetary and exchange rate regimes, the Central Bank of Chile imposed controls on capital inflows together with a gradual liberalization of capital outflows. The main instrument used to limit inflows was the reserve requirement, whereby a fraction (initially, 20%) of capital inflows had to be deposited in a Central Bank account bearing no interest. The stated purpose of this policy was to reduce net inflows by increasing related costs, and stop the appreciation of the peso, as a competitive exchange rate was thought to be a key factor in the successful economic recovery since the mid-1980s. The reserve requirement would also favor the independence of monetary policy in the context of an exchange rate managed within a band. Finally, the reserve requirement was also intended to reduce short-term capital inflows and thus limit financial vulnerability.
Since then, the Central Bank has intervened on three occasions. The first time, in August 2001, the Central Bank announced that it might intervene at any moment from then to the end of the year. It also explained that the exchange rate was depreciating very fast and with great volatility, which was cause for concern in financial markets, despite the fact that the peso was weakening largely because of stressful conditions abroad. The intervention consisted in a sale of up to $ billion of international reserves and issuing another $ billion in dollarindexed bonds. The final intervention amounted to a sale of slightly above $ million and the full issuance of bonds. The second time, in October 2002, the Bank announced a similar package, as it considered that the depreciation reflected an overreaction, high volatility and a liquidity shortage. $ billion were issued in exchange rate indexed debt and no reserves were sold. The third time, in April 2008, because of the high global uncertainty, the Bank decided to increase its holdings of reserves, while recognizing that, at the time of the announcement, the exchange rate was appreciated relative to its long-term fundamentals. The intervention consisted in daily purchases of $ million intended to accumulate $ billion in eight months. The outburst of the global financial collapse in September 2008 made us suspend these measures. The evidence at hand indicates that these interventions had an immediate impact on the exchange rate of around 3%, but on some occasions they also altered its later trend.