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Capital flows, capital controls and currency crisis: the case of Brazil in the nineties

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The resumption of capital flows to developing countries in the nineties is intertwined in the Brazilian case with the attempts to achieve inflation stabilization. A very restrictive monetary policy has offered probably the world’s highest yield to fixed income investments. In the context of favorable external factors to capital flows, the huge interest rate differential caused massive short term capital inflows to Brazil. After 1995, foreign direct investment, mainly associated with the privatization process, has became more important as a source of foreign capital. During the first period, the magnitude of those flows exacerbated two main macroeconomic problems: an increase in the quasi-fiscal deficit due to the interest payments on the debt used to sterilize the inflows, and, after the Real Plan, also the overvaluation of the currency. The restrictions to capital inflows are described and analyzed, as well as the main financial engineering strategies used to circumvent the restrictions. Given the advanced stage of domestic financial markets - including a powerful derivatives market- the restrictions imposed have not been fully effective in preventing the inflows of short term foreign capital to invest in the high-yield-public debt, but they probably had a temporary effect. Given the small progress achieved so far in the fiscal side of the reforms, it is also doubtful that the capital inflows' restrictions have been effective in a broader sense, that of allowing the government to buy time to implement the essential structural reforms. By reducing the urgency of the politically costly structural reforms aimed at increasing domestic savings, capital inflows have detrimental incentive effects on the government’s resolve to push forward the stabilization plan, as shown by the lack of commitment in carrying out the fiscal package promised during the Asian crisis. If the external finance package is successful in deterring the current daily losses of foreign reserves and in regaining the market’s confidence, it remains to be seen if the current crisis was strong enough to make the newly reelected Brazilian government live up to its renewed promise of fiscal austerity.

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  • Márcio gomes Pinto Garcia & Marcus Vinicius Ferrero Valpassos, 1998. "Capital flows, capital controls and currency crisis: the case of Brazil in the nineties," Textos para discussão 389, Department of Economics PUC-Rio (Brazil).
  • Handle: RePEc:rio:texdis:389
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    File URL: http://www.econ.puc-rio.br/uploads/adm/trabalhos/files/td389.pdf
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    1. Eliana Cardoso & Ilan Goldfajn, 1998. "Capital Flows to Brazil: The Endogeneity of Capital Controls," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 161-202, March.
    2. Bacha, Edmar, 1997. "Plano Real: uma segunda avaliação," Coediciones, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 1541.
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    1. Ilan Goldfajn & André Minella, 2007. "Capital Flows and Controls in Brazil: What Have We Learned?," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices, and Consequences, pages 349-420, National Bureau of Economic Research, Inc.
    2. Jean-Pierre Allegret, 2000. "Quel role pour les controles des mouvements internationaux de capitaux ?," Economie Internationale, CEPII research center, issue 81, pages 77-108.
    3. Nicola Kim Rowbotham, Adrian Saville & Douglas Mbululu, 2014. "Exchange Rate Policy and Export Performance in Efficiency-Driven Economies," Working Papers 469, Economic Research Southern Africa.
    4. Salgado, Maria José S. & Garcia, Márcio G. P. & Medeiros, Marcelo C., 2005. "Monetary Policy During Brazil´s Real Plan: Estimating the Central Bank´s Reaction Function," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 59(1), January.
    5. Marcio Garcia & Roberto Rigobon, 2004. "A Risk Management Approach to Emerging Market's Sovereign Debt Sustainability with an Application to Brazilian Data," NBER Working Papers 10336, National Bureau of Economic Research, Inc.
    6. Sen Gupta, Abhijit, 2010. "Management of International Capital Flows: The Indian Experience," MPRA Paper 23747, University Library of Munich, Germany.
    7. Bozhechkova, Alexandra (Божечкова, Александра) & Goryunov, Evgeny (Горюнов, Евгений) & Sinelnikov-Murylev, Sergey (Синельников-Мурылев, Сергей) & Trunin, Pavel V. (Трунин, Павел), 2017. "Capital Controls: World Experience and Lessons for Russia
      [Ограничения На Движение Капитала: Мировой Опыт И Уроки Для России]
      ," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 2, pages 8-43, April.

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