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

42 Pages Posted: 16 Jun 2006 Last revised: 26 Jul 2010

See all articles by Bernardo S. de M. Carvalho

Bernardo S. de M. Carvalho

Independent

Marcio G. P. Garcia

Pontifical Catholic University - Department of Economics

Date Written: June 2006

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.

Suggested Citation

Carvalho, Bernardo S. de M. and Garcia, Marcio G. P., Ineffective Controls on Capital Inflows Under Sophisticated Financial Markets: Brazil in the Nineties (June 2006). NBER Working Paper No. w12283. Available at SSRN: https://ssrn.com/abstract=906761

Bernardo S. de M. Carvalho

Independent ( email )

No Address Available

Marcio G. P. Garcia (Contact Author)

Pontifical Catholic University - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil
(5521) 274 2797 or 294 5490 (Phone)
(5521) 294 2095 (Fax)

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