Optimal Capital Flow Taxes in Latin America
AbstractThis paper estimates optimal capital flow taxes for Latin American economies based on early warning models for sudden stops. The paper adopts the externality view advanced by Korinek (2010), according to which domestic agents do not internalize the costs of high debt in bad states of nature. Capital flow taxes realign private and social incentives, therefore avoiding credit constraints problems in the future. The early warning estimates of crisis likelihood, severity and amplification dynamics provide new stylized evidence on the externality view. The most relevant and statistically significant conditioning states were found to be international risk aversion, net foreign asset position, international reserves and overvaluation indicators. An interesting rule of thumb that emerged from the empirical estimates is that capital flow taxes should be proportional to the square of the likelihood of an external crisis.
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Bibliographic InfoPaper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 268.
Date of creation: Mar 2012
Date of revision:
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Web page: http://www.bcb.gov.br/?english
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-03 (All new papers)
- NEP-CBA-2012-04-03 (Central Banking)
- NEP-IFN-2012-04-03 (International Finance)
- NEP-LAM-2012-04-03 (Central & South America)
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