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Capital Controls in Brazil – Stemming a Tide with a Signal

Author

Listed:
  • Yothin Jinjarak

    (SOAS, University of London)

  • Ilan Noy

    (University of Hawaii and Victoria Business School in Wellington)

  • Huanhuan Zheng

    (The Chinese University of Hong Kong)

Abstract

Controls on capital inflows have been experiencing a period akin to a renaissance since the beginning of the global financial crisis in 2008, with several prominent countries choosing to impose controls; e.g., Thailand, Korea, Peru, Indonesia, and Brazil. We focus on the case of Brazil, a country that instituted five changes in its capital account regime in 2008-2011, and ask what the impacts of these policy changes were. Using the Abadie et al. (2010) synthetic control methodology, we construct counterfactuals (i.e., Brazil with no capital account policy change) for each policy change event. We find no evidence that any tightening of controls was effective in reducing the magnitudes of capital inflows, but we observe some modest and short-lived success in preventing further declines in inflows when the capital controls are relaxed as was done in the immediate aftermath of the Lehman bankruptcy in 2008 and in January 2011 by the newly inaugurated government of Dilma Rousseff. We hypothesize that price-based capital controls’ only perceptible effect are to be found in the content of the signal they broadcast regarding the government’s larger intentions and sensibilities. Brazil’s left-of-center government was widely perceived as ambivalent to markets. An imposition of controls was not perceived as ‘news’ and thus had no impact. A willingness to remove controls was perceived, however, as a noteworthy indication that the government was not as hostile to the international financial markets as many expected it to be.

Suggested Citation

  • Yothin Jinjarak & Ilan Noy & Huanhuan Zheng, 2012. "Capital Controls in Brazil – Stemming a Tide with a Signal," Working Papers 201213, University of Hawaii at Manoa, Department of Economics.
  • Handle: RePEc:hai:wpaper:201213
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    References listed on IDEAS

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    More about this item

    Keywords

    Capital control; Brazil; Global financial crisis; Mutual fund flows; Exchange rate;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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