Chilean Economic Crisis (82–86): Twin Crisis-Finance/Banking Crisis

Abstract

The Chilean economy was forced to pursue liberalization policies in the 1970s. The increasing public deficit along with unemployment and inflation made the Chilean economy a financial market open to global capital movements. The liberalization movement brought along financial liberalization and the Chilean financial sector, which joined the international financial markets, contributed to the economic growth process with rapid growth. However, financial liberalization made financial markets vulnerable due to rapid capital flows, leading to increased economic risks. In this context, the Chilean economy, with its fragile-unregulated banking sector and its transactions in financial markets, faced due to rapid money outflows in the medium and short term, leading to a financial-based banking crisis. The Chilean Twin Crisis highlighted the need for financial liberalization to be regulated, limited or supervised by high-level national actors such as the central bank. In this context, the study analyses the Chilean Twin Crisis together with its historical economic indicators and explains the effects of the economic-fiscal policies and economic developments.