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Ineffective controls on capital inflows under sophisticated financial markets: Brazil in the nineties

Marcio Garcia () and Bernando S. de M. Carvalho ()
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Bernando S. de M. Carvalho: Gávea Investimentos

No 516, Textos para discussão from Department of Economics PUC-Rio (Brazil)

Abstract: We analyze the Brazilian experience in the 1990s to access the effectiveness of controls on capital inflows in restricting financial inflows and changing their composition towards long term flows. Econometric exercises (VARs) lead us to conclude 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. We then conducted interviews with market players in order to provide several examples of the financial strategies that were used in this period to invest in the Brazilian fixed income market while bypassing capital controls. The main conclusion is that controls on capital inflows, while they may be desirable, are of very limited effectiveness under sophisticated financial markets. Therefore, policy-makers should avoid spending the scarce resources of bank supervision trying to implement them and focus more in improving economic policy.

JEL-codes: E44 F32 F34 F36 G15 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2006-03
New Economics Papers: this item is included in nep-cba, nep-fin, nep-fmk, nep-lam, nep-mac and nep-mon
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Citations: View citations in EconPapers (13)

Published in National Bureau of Economic Research Working Paper no. 12283, 2006

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Chapter: Ineffective Controls on Capital Inflows under Sophisticated Financial Markets: Brazil in the Nineties (2008) Downloads
Working Paper: Ineffective Controls on Capital Inflows Under Sophisticated Financial Markets: Brazil in the Nineties (2006) Downloads
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