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Ineffective controls on capital inflows under sophisticated financial markets: Brazil in the nineties

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Author Info
Márcio Gomes Pinto Garcia () (Department of Economics PUC-Rio)
Bernando S. de M. Carvalho () (Gávea Investimentos)

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Abstract

We analyze the Brazilian experience in the 1990s to access the effectiveness of controls on capital inflows in restricting financial inflows and changing their composition towards long term flows. Econometric exercises (VARs) lead us to conclude 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. We then conducted interviews with market players in order to provide several examples of the financial strategies that were used in this period to invest in the Brazilian fixed income market while bypassing capital controls. The main conclusion is that controls on capital inflows, while they may be desirable, are of very limited effectiveness under sophisticated financial markets. Therefore, policy-makers should avoid spending the scarce resources of bank supervision trying to implement them and focus more in improving economic policy.

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Paper provided by Department of Economics PUC-Rio (Brazil) in its series Textos para discussão with number 516.

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Length: 43 pages
Date of creation: Mar 2006
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Publication status: Published in National Bureau of Economic Research Working Paper no. 12283, 2006
Handle: RePEc:rio:texdis:516

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Find related papers by 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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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Pasricha, Gurnain, 2008. "Financial integration in emerging market economies," MPRA Paper 2257, University Library of Munich, Germany, revised 10 Apr 2008. [Downloadable!]
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