Capital controls in Brazil: Effective?

Abstract

Highlights Brazil has actively experimented with capital controls since 2009.  Controls succeeded in segmenting the Brazilian and international financial markets.  First several measures did not substantially affect the exchange rate.  But exchange rate strongly depreciates after three last restrictions imposed.  Cumulative effect of measures considered depreciated the BRL by about 10%. Abstract A large theoretical literature emerged in recent years analyzing the positive and normative effects of capital controls, begging for empirical studies to validate it. No emerging market experimented as Economics, PUC-Rio, mgarcia@econ.puc-rio.br . The views expressed are those of the authors and should not be attributed to the IMF or any other institution. We thank BM&FBovespa for data; many traders for enlightment of the pratical implications of the controls; actively with capital controls as Brazil did during the aftermath of the 2008 crisis, when foreign capital poured in emerging markets. We analyze the impact of the capital controls that Brazil adopted since late 2009. These policies had some success in segmenting the Brazilian from global financial markets, as measured by the spread between onshore and offshore dollar interest rates, as well as ADR premium relative to the underlying local stocks. The measures adopted from late 2009 to mid-2011 did not translate into significant changes in the exchange rate, suggesting limited success in mitigating exchange rate appreciation. However, the exchange rate strongly depreciates after a tax on the notional amount of derivatives is adopted in mid-2011. The last of the three restrictions studied may have depreciated the Brazilian real in the range from 4 to 10 percent. That strong response may have been driven by complementarities with the previous measures, as well as an unexpected easing in monetary policy. JEL Codes: F31, F32, F36 and F65

Beyond capital controls: Regulation of foreign currency derivatives markets in the Republic of Korea and Brazil after the global financial crisis

“…In this setting, fx futures operations have a key influence in the real-dollar exchange rate trend, as many studies point out (Farhi, 2010;Ventura and García, 2009;Prates, Cunha and Lélis 2009a;Kaltenbrunner, 2010;Chamon and Garcia, 2013). The most important determinant of the higher liquidity and depth of the fx futures market relative to the spot market is the prohibition of foreign currency accounts (bank deposits), with only a few exceptions.…”

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Ruling capital: emerging markets and the reregulation of cross-border finance

“…One study (Chamon and Garcia 2013) analyzes the impact of the Brazilian regulations on inflows since 2009, on the prices of financial assets, and on exchange rate appreciation. It finds that regulations were effective in distorting prices by making domestic assets relatively more expensive, thereby making such assets less attractive to foreign investors.…”

“…In another study, Eduardo Levy- Yeyati and Andrea Kiguel (2009) quantify the effectiveness of a specific Brazilian control, the IOF, on the Brazilian exchange rate by running regression analyses similar to those of Marcos Chamon and Marcio Garcia (2013), and they also find that the measures had the desired effect. Kristin Forbes and Francis Warnock (2011) examine the IOF tax in Brazil but test only the impact on portfolio flows, using the Emerging Portfolio Fund Research database.…”

Price Discovery in Brazilian FX Markets

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