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Bubble thy neighbor: portfolio effects and externalities from capital controls

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  • Forbes, Kristin
  • Fratzscher, Marcel
  • Kostka, Thomas
  • Straub, Roland

Abstract

We use changes in Brazil’s tax on capital inflows from 2006 to 2011 to test for direct portfolio effects and externalities from capital controls on investor portfolios. The analysis is structured based on information from investor interviews. We find that an increase in Brazil’s tax on foreign investment in bonds causes investors to significantly decrease their portfolio allocations to Brazil in both bonds and equities. Investors simultaneously increase allocations to other countries that have substantial exposure to China and decrease allocations to countries viewed as more likely to use capital controls. Much of the effect of capital controls on portfolio flows appears to occur through signalling —i.e. changes in investor expectations about future policies— rather than the direct cost of the controls. This evidence of significant externalities from capital controls suggests that any assessment of controls should consider their effects on portfolio flows to other countries. JEL Classification: F3, F4, F5, G0, G1

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1456.

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Date of creation: Aug 2012
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Handle: RePEc:ecb:ecbwps:20121456

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Keywords: Brazil; Capital controls; emerging markets; externalities; mutual funds; portfolio effects; signalling; spillovers;

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References

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Citations

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Cited by:
  1. Fratzscher, Marcel & Lo Duca, Marco & Straub, Roland, 2012. "A global monetary tsunami? On the spillovers of US Quantitative Easing," CEPR Discussion Papers 9195, C.E.P.R. Discussion Papers.
  2. Kristin Forbes & Marcel Fratzscher & Roland Straub, 2013. "Capital Controls and Macroprudential Measures: What Are They Good For?," Discussion Papers of DIW Berlin 1343, DIW Berlin, German Institute for Economic Research.
  3. Marcel Fratzscher & Marco Lo Duca & Roland Straub, 2013. "On the International Spillovers of US Quantitative Easing," Discussion Papers of DIW Berlin 1304, DIW Berlin, German Institute for Economic Research.
  4. Ramos-Tallada, J., 2013. "Le FMI et la gestion des flux de capitaux : la longue route vers une approche pragmatique," Bulletin de la Banque de France, Banque de France, issue 192, pages 95-110.
  5. Marcos Chamon & Marcio Garcia, 2013. "Capital controls in Brazil: effective?," Textos para discussão 606, Department of Economics PUC-Rio (Brazil).
  6. Raquel Almeida Ramos, 2012. "Dealing with Exchange Rate Issues: Reserves or Capital Controls?," Policy Research Brief 32, International Policy Centre for Inclusive Growth.
  7. Jinjarak, Yothin & Noy, Ilan & Zheng, Huanhuan, 2013. "Capital controls in Brazil – Stemming a tide with a signal?," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2938-2952.
  8. Raddatz, Claudio & Schmukler, Sergio L. & Williams, Tomas, 2014. "International asset allocations and capital flows : the benchmark effect," Policy Research Working Paper Series 6866, The World Bank.
  9. Vivek Arora & Karl Habermeier & Jonathan D. Ostry & Rhoda Weeks-Brown, 2013. "La liberalización y el manejo de los flujos de capital: una visión institucional," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 15(28), pages 205-255, January-J.
  10. Jinjarak, Yothin & Noy, Ilan & Zheng, Huanhuan, 2013. "What Lessons Can Asia Draw from Capital Controls in Brazil during 2008–2012?," ADBI Working Papers 423, Asian Development Bank Institute.
  11. Philip Lane, 2013. "International Capital Flows and Domestic Financial Conditions: Lessons for Emerging Asia," The Institute for International Integration Studies Discussion Paper Series iiisdp438, IIIS.
  12. Eichengreen, Barry, 2013. "Currency war or international policy coordination?," Journal of Policy Modeling, Elsevier, vol. 35(3), pages 425-433.

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