Abstract

http://ssrn.com/abstract=2056491
 
 

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Bubble Thy Neighbor: Portfolio Effects and Externalities from Capital Controls


Kristin J. Forbes


Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Marcel Fratzscher


DIW Berlin; Centre for Economic Policy Research (CEPR)

Thomas Kostka


European Central Bank (ECB)

Roland Straub


European Central Bank (ECB)

April 27, 2012

MIT Sloan Research Paper No. 4962-12

Abstract:     
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.

Number of Pages in PDF File: 48

Keywords: capital controls, externalities, spillovers, portfolio effects, signalling, mutual funds, Brazil, emerging markets

JEL Classification: F3, F4, F5, G0, G1

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Date posted: May 12, 2012  

Suggested Citation

Forbes, Kristin J. and Fratzscher, Marcel and Kostka, Thomas and Straub, Roland, Bubble Thy Neighbor: Portfolio Effects and Externalities from Capital Controls (April 27, 2012). MIT Sloan Research Paper No. 4962-12. Available at SSRN: http://ssrn.com/abstract=2056491 or http://dx.doi.org/10.2139/ssrn.2056491

Contact Information

Kristin J. Forbes (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
Room E62-416
Cambridge, MA 02142
United States
617-253-8996 (Phone)
HOME PAGE: http://web.mit.edu/kjforbes/www
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Marcel Fratzscher
DIW Berlin ( email )
Mohrenstraße 58
Berlin, 10117
Germany
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Thomas Kostka
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Frankfurt am Main, D-60311
Germany
Roland Straub
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Frankfurt am Main, D-60311
Germany
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