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Bubble Thy Neighbor: Portfolio Effects and Externalities from Capital Controls

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

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18052.

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Date of creation: May 2012
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Publication status: published as Forbes, Kristin J. & Fratzscher, Marcel & Kostka, Thomas & Straub, Roland, 2012. "Bubble thy neighbor: portfolio effects and externalities from capital controls," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 1-48.
Handle: RePEc:nbr:nberwo:18052

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References

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  1. Bekaert, Geert & Ehrmann, Michael & Fratzscher, Marcel & Mehl, Arnaud, 2011. "Global crises and equity market contagion," Working Paper Series, European Central Bank 1381, European Central Bank.
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Citations

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Cited by:
  1. Yothin Jinjarak & Ilan Noy & Huanhuan Zheng, 2012. "Capital Controls in Brazil – Stemming a Tide with a Signal," Working Papers, University of Hawaii at Manoa, Department of Economics 201213, University of Hawaii at Manoa, Department of Economics.
  2. Jinjarak, Yothin & Noy, Ilan & Zheng, Huanhuan, 2013. "What Lessons Can Asia Draw from Capital Controls in Brazil during 2008–2012?," ADBI Working Papers, Asian Development Bank Institute 423, Asian Development Bank Institute.
  3. Forbes, Kristin & Fratzscher, Marcel & Straub, Roland, 2014. "Capital Controls and Macroprudential Measures: What Are They Good For?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9798, C.E.P.R. Discussion Papers.
  4. Eichengreen, Barry, 2013. "Currency war or international policy coordination?," Journal of Policy Modeling, Elsevier, Elsevier, vol. 35(3), pages 425-433.
  5. Fratzscher, Marcel & Lo Duca, Marco & Straub, Roland, 2013. "On the international spillovers of US quantitative easing," Working Paper Series, European Central Bank 1557, European Central Bank.
  6. Philip Lane, 2013. "International Capital Flows and Domestic Financial Conditions: Lessons for Emerging Asia," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp438, IIIS.
  7. Raquel Almeida Ramos, 2012. "Dealing with Exchange Rate Issues: Reserves or Capital Controls?," Policy Research Brief 32, International Policy Centre for Inclusive Growth.
  8. 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, Banque de France, issue 192, pages 95-110.
  9. Fratzscher, Marcel & Lo Duca, Marco & Straub, Roland, 2012. "A global monetary tsunami? On the spillovers of US Quantitative Easing," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9195, C.E.P.R. Discussion Papers.
  10. 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, Universidad Externado de Colombia - Facultad de Economía, vol. 15(28), pages 205-255, January-J.
  11. Marcos Chamon & Marcio Garcia, 2013. "Capital controls in Brazil: effective?," Textos para discussão, Department of Economics PUC-Rio (Brazil) 606, Department of Economics PUC-Rio (Brazil).
  12. 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.

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