Capital Flows to Brazil: The Endogeneity of Capital Controls
International Monetary Fund Staff Papers, Vol. 45, March 1998
Posted: 16 Jul 1998
This paper investigates the determinants of capital flows to Brazil and constructs an index of capital controls that includes restrictions on both outflows and inflows. The paper explicitly takes into account the endogeneity of capital controls through a government reaction function that sets controls in line with capital flows. Using instrumental variables, the paper shows that the government reacts strongly to capital flows by increasing controls in booms and relaxing them in moments of distress. The paper estimates a vector autoregression with monthly capital flows, controls, and interest differentials. It shows that controls have been temporarily effective in altering the level and composition of capital flows within a 6-month period and have been responsible for up to 30 percent of the forecasted variance of capital flows, but have had no sustained long-run effects.
Note: This is a description of the paper and not the actual abstract.
JEL Classification: F32, F41
Suggested Citation: Suggested Citation