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Foreign funding to an emerging market: the Monetary Premium Theory and the Brazilian Case, 1991 - 1998

  • Flôres Junior, Renato Galvão
  • Araújo, Carlos Hamilton Vasconcelos

We develop a framework to explain the private capital flows between the rest of the world and an emerging economy. The model, based on the monetary premium theory, relates an endogenous supply of foreign capitals to an endogenous differential of interest rates; its estimation uses the econometric techniques initiated by Heckman. Four questions regarding the capital flows phenomenon are explored, including the statistical process that governs the events of default and the impact of the probability of default on the interest rate differential. Using the methodology, we analyse the dynamics of foreign capital movements in Brazil during the 1991- 1998 period.

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Paper provided by FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil) in its series Economics Working Papers (Ensaios Economicos da EPGE) with number 459.

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Date of creation: 23 Oct 2002
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Handle: RePEc:fgv:epgewp:459
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