Vulnerabilidade externa e controle de capitais no Brasil: uma análise das inter-relações entre câmbio, fluxos de capitais, IOF, juros e risco-país [External vulnerability and capital controls in Brazil: an analysis of the interrelation between the exchange rate, capital flows, the IOF, interest rates and country risk]

In face of the severity of the financial crisis of 2007/08, the external vulnerability of developing countries has increased. This has brought up the reassessment of capital controls. Based on the importance of restricting international capital movements, the aim of this paper is to investigate the interrelation between the following variables of the Brazilian economy: the exchange rate, capital flows, the IOF (Tax on Financial Operations), interest rates and country risk. Specifically, we intend to assess whether a higher IOF on foreign exchange transactions leads to significant impacts on volatile capital flows between 1995 and 2011. By applying a VAR model, the empirical analysis suggests that speculative financial flows respond poorly to small changes in the IOF. They are more closely associated with movements in the exchange rate and in the country risk. Given the low efficacy of capital controls via the IOF, we stress the need for more concrete measures that effectively inhibit foreign investors' speculation.