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Andrew K. Rose Berkeley-Haas, CEPR and NBER

Comments on Forbes, Fratzscher , Kostka and Straub “ Bubble Thy Neighbor : Portfolio Effects …” . Andrew K. Rose Berkeley-Haas, CEPR and NBER. Key Message. Brazil’s bond taxes lower: Brazilian bond holding

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Andrew K. Rose Berkeley-Haas, CEPR and NBER

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  1. Comments on Forbes, Fratzscher, Kostka and Straub “Bubble Thy Neighbor: Portfolio Effects …” Andrew K. Rose Berkeley-Haas, CEPR and NBER

  2. Key Message • Brazil’s bond taxes lower: • Brazilian bond holding • Equity holdings in “control risk” countries (Colombia, Indonesia, Peru, Thailand ….) • Focus in this paper: cross-country • Also interesting: cross-asset • Brazilian bond taxes lowers Brazilian equity holdings more than Brazilian bonds! (Table 6)

  3. The Good • Good Question • Interesting, original, topical, important • New Data Set • Choice of Brazil • Good tax variation • Important country, possibility of spillovers • Very Careful, Thorough Work • Frustratingly so (for discussant) • Nice Quantitative Summary of Effects • Most Caveats included

  4. Not as Good • How scalable is the finding? • Interview evidence from equity investors makes it look like taxes should be irrelevant (makes one suspicious of a fishing expedition) • Ex: is three months optimal? • Ex: why use change in IOF for just bonds? • Little motivation for externalities from interviews • Is stronger coverage of equity (4x bonds) the reason for findings? • Data coverage, not true effect? • Some (mild) over-statement • But most results shown, warts and all; authors very aware of sensitivities

  5. Nit-Picking? • If Brazil weight falls, then something else must rise (possibly cash) • Odd that effects of IOF are: • 16.6%-19.7% for global equity funds • Only 3.1%-4.8% for global emerging market equity • Only 0.1-2.1% for Latin American regional equity • Only 5-5.1% for Global emerging market bonds • Would have expected opposite!

  6. Most Externality Estimates Small • Ex: discussion (p19) of Table 4 (key!) “This indicates that there are no significant externalities from changes in the IOF on average portfolio allocations to all other countries in the sample.”

  7. Bubble thy Neighbor? • Where’s the evidence of bubbles? • If pecuniary externality with complete markets, effects offset each other; Pareto efficiency • Reasonable in financial markets? • “Bubble” a loaded word

  8. A Worry: Low Effect of Benchmark • Looks like 1:1 effect in Figure 1 • Very far from 1 in empirics (β≈.7) • Why so low? Measurement Error? Something that requires IV? • First “Iron Law” of Econometrics: coefficients biased down • Why not impose coefficient of 1 on benchmark?

  9. Referee Questions/Points • Why start in 2006, not earlier? • Trade Diversion analogy a red herring • Trade diversion with discriminatory taxes, differential prices (RTAs are not multilateral) • Irrelevant here! • Box-Cox test for levels vs. logs • If errors iid in (1), should be MA(1) in (2) • More generally: test for dynamics? • Especially with transitory taxes? • Is (3) necessary? • Usually don’t care about covariances between regressors • Descriptive statistics in Table 3 would help

  10. My Take: Believable … on Brazil • Evidence of Externalities Weak • Most direct evidence is negative: why so little effect on bonds? • Little in Tables 4-6 • Relatively little evidence on equities too • Appeal to Signaling Story (Bartolini-Drazen) • But no direct evidence of signaling • Just a consistent interpretation

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