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Capital Controls in Brazil: Stemming a Tide with a Signal?

  • Jinjarak, Y
  • Noy, I
  • Zheng, H

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.

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File URL: http://researcharchive.vuw.ac.nz/handle/10063/2391
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Paper provided by Victoria University of Wellington, School of Economics and Finance in its series Working Paper Series with number 2391.

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Date of creation: 2012
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Handle: RePEc:vuw:vuwecf:2391
Contact details of provider: Postal: Alice Fong, Administrator, School of Economics and Finance, Victoria Business School, Victoria University of Wellington, PO Box 600 Wellington, New Zealand
Phone: +64 (4) 463-5353
Fax: +64 (4) 463-5014
Web page: http://www.victoria.ac.nz/sef
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  6. Straub, Roland & Forbes, Kristin & Fratzscher, Marcel & Kostka, Thomas, 2013. "Bubble Thy Neighbor: Portfolio Effects and Externalities from Capital Controls," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79785, Verein für Socialpolitik / German Economic Association.
  7. Sebastian Edwards, 2012. "The Federal Reserve, Emerging Markets, and Capital Controls: A High Frequency Empirical Investigation," NBER Working Papers 18557, National Bureau of Economic Research, Inc.
  8. Sebastian Edwards, 2012. "The Federal Reserve, the Emerging Markets, and Capital Controls: A High‐Frequency Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 151-184, December.
  9. 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.
  10. Chinn,M.D. & Ito,H., 2005. "What matters for financial development? : capital controls, institutions, and interactions," Working papers 4, Wisconsin Madison - Social Systems.
  11. Nicolas E. Magud & Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "Capital Controls: Myth and Reality - A Portfolio Balance Approach," NBER Working Papers 16805, National Bureau of Economic Research, Inc.
  12. Paolo Pinotti, 2012. "The Economic Costs of Organized Crime: Evidence from Southern Italy," Working Papers 054, "Carlo F. Dondena" Centre for Research on Social Dynamics (DONDENA), Università Commerciale Luigi Bocconi.
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  16. Straetmans, Stefan & Versteeg, Roald & Wolff, Christian C, 2008. "Are Capital Controls in the Foreign Exchange Market Effective?," CEPR Discussion Papers 6727, C.E.P.R. Discussion Papers.
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  18. Michael W. Klein, 2012. "Capital Controls: Gates versus Walls," NBER Working Papers 18526, National Bureau of Economic Research, Inc.
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  20. Abadie, Alberto & Diamond, Alexis & Hainmueller, Jens, 2010. "Synthetic Control Methods for Comparative Case Studies: Estimating the Effect of California’s Tobacco Control Program," Journal of the American Statistical Association, American Statistical Association, vol. 105(490), pages 493-505.
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  25. Peter Hinrichs, 2012. "The Effects of Affirmative Action Bans on College Enrollment, Educational Attainment, and the Demographic Composition of Universities," The Review of Economics and Statistics, MIT Press, vol. 94(3), pages 712-722, August.
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