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Comments on Capital Control

Comments on Capital Control. Jorge Arbache Brazilian Development Bank and University of Brasilia This presentation does not reflect the views of the Brazilian Government or the board of the BNDES Carnegie Endowment for International Peace, May 4, 2010. Structure of presentation.

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Comments on Capital Control

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  1. Comments on Capital Control Jorge Arbache Brazilian Development Bank and University of Brasilia This presentation does not reflect the views of the Brazilian Government or the board of the BNDES Carnegie Endowment for International Peace, May 4, 2010

  2. Structure of presentation • Some evidence on capital control, capital flow, institutions and output growth • Brazil

  3. 1. Some evidence on capital control, capital flow, institutions and output growth

  4. Data • Financial openness data: 0~1 • Source: Schindler 2009 • Period: 1995-2005 • Number of countries: 61 • Financial flows: % GDP • Source: Reinhardt 2009 • Period: 1985-2008 • Number of countries: 43 • Growth acceleration and deceleration: dichotomic variables • Method: Arbache and Page 2007 • Period: 1980-2008 • Number of countries: 162 • Institutions and policy indicators: -2.5~2.5 • Source: World Bank Governance Indicators

  5. Some basic statisticsEmerging economies 0 – unrestricted capital account; 1 – restricted capital account

  6. Is capital control more likely to be adopted in countries with weak or strong institutions?Correlation coefficients - capital control and institutions* 1% significance level; ** 5% significance level Overall rest.; shares; voice and accountability and regulatory quality – larger coef.

  7. Do weak institutions discourage capital inflow?Correlation coefficients - capital inflow and institutions* 1% significance level; ** 5% significance level Debt liabilities – no correlation

  8. Does capital control affect output growth? Logistic regression RE (z statistics in parentheses) No evidence that capital control prevents growth collapse – no long term impacts

  9. Does capital inflow affect output growth? Logistic regression RE (z statistics in parentheses) Non-financial FDI and equities are associated with less growth collapses and more growth acceleration; debt liabilities: the opposite

  10. Capital controls: more likely in countries with weak institutions • FDI and equity capital: flow to where institutions are strong; no relationship between institutions and debt • Debt liability probably driven by other factors • Capital control does not prevent growth collapses • It may be effective under certain conditions • Long term impacts unlikely • FDI and equity capital reduce growth collapses and increase growth acceleration • Debt liability increases growth collapses and decreases growth acceleration Capital control on short term capital: policy option

  11. 2. Brazil

  12. Brazil: • Liberalized the capital account • Adopted floating exchange rate • Adopted inflation target • Prudential financial regulations in place • Investment grade status 2008/09 • Attracted a lot of foreign resources • Reserves have increased substantially

  13. Capital inflow has increased sharply in recent years

  14. Brazil has liberalized the capital accountSource: Schindler 2009 0 – unrestricted capital account; 1 – restricted capital account

  15. Recent measures on capital control • March 2008: taxes on capital account transactions, 1.5%; several exemptions • May 2008: coverage extended to prevent circumvention • October 2008: taxes lifted • October 2009: 2% tax on fixed-income and equity inflows • November 2009: 1.5% tax on certain trades to prevent circumvention No evidence that these measures have been effective to discourage capital inflow (IMF 2010)

  16. Brazil: composition of financial flowsSource: Central Bank

  17. External sector indicators have improved significantly…Source: Central Bank

  18. …but there are increasing challengesSource: Central Bank

  19. Is capital control needed in Brazil? • Exchange rate appreciation • Widening current account deficits • Export competitiveness impacts • Asset prices: Bovespa index increased more than 300% since 2005; real state at record price levels • Prices anchored on cheap imports • Inflation pressures • Effectiveness of monetary policy questionable A more vigorous capital control is needed as a short term policy option But more structural policies still required -- e.g. fiscal

  20. Thank You

  21. GDP per capita growth and capital controlBrazil, China, Indonesia, India, Mexico, Russia, Turkey, South Africa

  22. Brazil: GDP per capita growth and capital control

  23. India Indonesia Russia China

  24. GDP per capita growth and capital controlNumber of countries = 61

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