Capital Flows to Brazil: The Endogeneity of Capital Controls

International Monetary Fund Staff Papers, Vol. 45, March 1998

Posted: 16 Jul 1998

See all articles by Eliana Cardoso

Eliana Cardoso

Georgetown University - Edmund A. Walsh School of Foreign Service (SFS); National Bureau of Economic Research (NBER)

Ilan Goldfajn

Gávea Investimentos; Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics; Central Bank of Brazil

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Abstract

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

Cardoso, Eliana and Goldfajn, Ilan, Capital Flows to Brazil: The Endogeneity of Capital Controls. International Monetary Fund Staff Papers, Vol. 45, March 1998. Available at SSRN: https://ssrn.com/abstract=108288

Eliana Cardoso

Georgetown University - Edmund A. Walsh School of Foreign Service (SFS)

Washington, DC 20057
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ilan Goldfajn (Contact Author)

Gávea Investimentos ( email )

Rua Dias Ferreira, 190 7th andar
22431-050 Rio de Janeiro
Brazil

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia DF 70074-900, Distr. Federal 70074-900
Brazil
61-4143232 (Phone)
61-2260767 (Fax)

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