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Optimal Capital Flow Taxes in Latin America

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  • João Barata Ribeiro Blanco Barroso

Abstract

This 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.

Suggested Citation

  • João Barata Ribeiro Blanco Barroso, 2012. "Optimal Capital Flow Taxes in Latin America," Working Papers Series 268, Central Bank of Brazil, Research Department.
  • Handle: RePEc:bcb:wpaper:268
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    File URL: http://www.bcb.gov.br/pec/wps/ingl/wps268.pdf
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    References listed on IDEAS

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    1. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    2. Nicolas Magud & Carmen Reinhart & Kenneth Rogoff, 2005. "Capital Controls: Myth and Reality A Portfolio Balance Approach to Capital Controls," University of Oregon Economics Department Working Papers 2006-10, University of Oregon Economics Department.
    3. Kaddour Hadri, 2000. "Testing for stationarity in heterogeneous panel data," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 148-161.
    4. Mendoza, Enrique G. & Smith, Katherine A., 2006. "Quantitative implications of a debt-deflation theory of Sudden Stops and asset prices," Journal of International Economics, Elsevier, vol. 70(1), pages 82-114, September.
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    Cited by:

    1. Cesar R. Van Der Laan & Marcos Tadeu C. Lélis & André Moreira Cunha, 2016. "External Capital Flows’ Management In The Great Recession: The Brazilian Experience (2007-2013)," Anais do XLII Encontro Nacional de Economia [Proceedings of the 42ndd Brazilian Economics Meeting] 035, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

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