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Bubble Thy Neighbor: Portfolio Effects and Externalities from Capital Controls

  • Straub, Roland
  • Forbes, Kristin
  • Fratzscher, Marcel
  • Kostka, Thomas

We use changes in Brazil s tax on capital inflows from 2006 to 2011 to test for direct portfolio effects and externalities from capital controls on investor portfolios. The analysis is structured based on information from investor interviews. We find that an increase in Brazil s tax on foreign investment in bonds causes investors to significantly decrease their portfolio allocations to Brazil in both bonds and equities. Investors simultaneously increase allocations to other countries that have substantial exposure to China and decrease allocations to countries viewed as more likely to use capital controls. Much of the effect of capital controls on portfolio flows appears to occur through signalling i.e. changes in investor expectations about future policies rather than the direct cost of the controls. This evidence of significant externalities from capital controls suggests that any assessment of controls should consider their effects on portfolio flows to other countries.

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File URL: http://econstor.eu/bitstream/10419/79785/1/VfS_2013_pid_866.pdf
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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79785.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79785
Contact details of provider: Web page: http://www.socialpolitik.org/
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  24. Arnaud Costinot & Guido Lorenzoni & Iv�n Werning, 2014. "A Theory of Capital Controls as Dynamic Terms-of-Trade Manipulation," Journal of Political Economy, University of Chicago Press, vol. 122(1), pages 77 - 128.
  25. Aizenman, Joshua & Sushko, Vladyslav, 2011. "Capital flows: Catalyst or Hindrance to economic takeoffs?," Santa Cruz Department of Economics, Working Paper Series qt79f5144f, Department of Economics, UC Santa Cruz.
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