Working Paper: NBER ID: w19205
Authors: Yothin Jinjarak; Ilán Noy; Huanhuan Zheng
Abstract: Controls on capital inflows have been experiencing a renaissance since 2008, with several prominent emerging markets implementing them. We focus on Brazil, which instituted five changes in its capital account regime in 2008-2011. Using the synthetic control method, we construct counterfactuals (i.e., Brazil with no policy change) for each of these changes. We find no evidence that any tightening of controls was effective in reducing the magnitudes of capital inflows, but we observe some modest and short-lived success in preventing further declines in inflows when the capital controls were relaxed. We hypothesize that price-based capital controls' only perceptible effect is to be found in the content of the signal they broadcast regarding the government's larger intentions and sensibilities. Brazil's left-of-center government's willingness to remove controls was perceived as a noteworthy indication that the government was not as hostile to the international financial markets as many expected it to be.
Keywords: Capital Controls; Brazil; Synthetic Control Method; Financial Markets
JEL Codes: E60; F32; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tightening capital controls (F38) | magnitude of capital inflows into Brazil (F21) |
| relaxing capital controls (F32) | further declines in inflows (F21) |
| imposition of controls (F38) | significant long-term impacts on capital flows (F32) |
| imposition of controls (F38) | significant long-term impacts on exchange rates (F31) |
| price-based capital controls (F38) | signaling about the government's intentions towards the international financial markets (F30) |
| Brazilian government's willingness to remove controls (F69) | less hostile environment for foreign investors (F64) |
| relaxation of capital controls (F32) | pronounced effects of capital controls (F38) |