Chile's encaje (1991-1998)

The "Introduction to Capital Controls" linked to above has a nice concise overview of Chile's capital controls in the 1990s. See the special box on Chile's encaje (1991-1998) on page 25 and also "Real Appreciation of the Exchange Rate" on pages 18 and 19. Here's the most important part:

"...During the late 1980s and early 1990s, international capital began to return to Chile as a result of slow growth and low interest rates in the developed world and sound macroeconomic policies, including reduced debt, in Chile (Edwards, 1998a). The Chilean authorities feared that these capital inflows would complicate monetary policy decisions—perhaps causing real appreciation of the exchange rate—and they also were wary of the danger of building up short-term debt.

Chile had long restricted capital flows and these limits were updated in the early 1990s to
deal with the surge in capital inflows. Direct investment was made subject to a 10-year stay
requirement in 1982; this period was reduced to three years in 1991 and to one-year in 1993.
Portfolio flows were made subject to the encaje—a one-year, mandatory, non-interest paying
deposit with the central bank—created in 1991 to regulate capital inflows.1 The encaje was
initially 20 percent but was increased to 30 percent in 1992. The penalty for early withdrawal
was 3 percent.

The effect of the encaje was to tax foreign capital inflows, with short-term flows being
taxed much more heavily than long-term flows. For example, consider the choice of an
American buying a one-year discount bond with a face value of 10,000 pesos for a price of 9,091
pesos, or a 10-year discount bond with the same face value and a price of 3,855 pesos. Either
bond, if held to maturity, would yield a 10 percent per annum return. In the presence of a 30
percent one-year reserve requirement, however, the one-year bond’s annual yield would be 7.7
percent and the 10-year bond’s annual yield would be 9.7 percent. Hence, the encaje acted as
a graduated tax on capital inflows."