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Ineffective Controls on Capital Inflows Under Sophisticated Financial Markets: Brazil in the Nineties

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  • Bernardo S. de M. Carvalho
  • Márcio G.P. Garcia

Abstract

We analyze the Brazilian experience in the 1990s to assess the effectiveness of controls on capital inflows in restricting financial inflows and changing their composition towards long term flows. Econometric exercises (VARs) showed that controls on capital inflows were effective in deterring financial inflows for only a brief period, from two to six months. The hypothesis to explain the ineffectiveness of the controls is that financial institutions performed several operations aimed at avoiding capital controls. To check this hypothesis, we conducted interviews with market players. We collected several examples of the financial strategies engineered to avoid the capital controls and invest in the Brazilian fixed income market. The main conclusion is that controls on capital inflows, while they may be desirable, are of very limited effectiveness under sophisticated financial markets.

Suggested Citation

  • Bernardo S. de M. Carvalho & Márcio G.P. Garcia, 2006. "Ineffective Controls on Capital Inflows Under Sophisticated Financial Markets: Brazil in the Nineties," NBER Working Papers 12283, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:12283
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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