Ineffective Controls on Capital Inflows Under Sophisticated Financial Markets: Brazil in the Nineties

Bernardo S. de M. Carvalho and Marcio Garcia

No 12283, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze the Brazilian experience in the 1990s to assess the effectiveness of controls on capital inflows in restricting financial inflows and changing their composition towards long term flows. Econometric exercises (VARs) showed that controls on capital inflows were effective in deterring financial inflows for only a brief period, from two to six months. The hypothesis to explain the ineffectiveness of the controls is that financial institutions performed several operations aimed at avoiding capital controls. To check this hypothesis, we conducted interviews with market players. We collected several examples of the financial strategies engineered to avoid the capital controls and invest in the Brazilian fixed income market. The main conclusion is that controls on capital inflows, while they may be desirable, are of very limited effectiveness under sophisticated financial markets.

JEL-codes: E44 F32 F34 F36 G15 (search for similar items in EconPapers)
Date: 2006-06
New Economics Papers: this item is included in nep-ban, nep-fmk and nep-mac
Note: IFM
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Citations: View citations in EconPapers (28)

Published as Ineffective Controls on Capital Inflows under Sophisticated Financial Markets: Brazil in the Nineties , Bernardo S. de M. Carvalho, Márcio G. P. Garcia. in Financial Markets Volatility and Performance in Emerging Markets , Edwards and Garcia. 2008

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Related works:
Chapter: Ineffective Controls on Capital Inflows under Sophisticated Financial Markets: Brazil in the Nineties (2008)
Working Paper: INEFFECTIVE CONTROLS ON CAPITAL INFLOWS UNDER SOPHISTICATED FINANCIAL MARKETS: BRAZIL IN THE NINETIES (2006)
Working Paper: Ineffective controls on capital inflows under sophisticated financial markets: Brazil in the nineties (2006)
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