Citation

Discussion Paper Details

Please find the details for DP8979 in an easy to copy and paste format below:

Full Details

Title: Bubble Thy Neighbor: Portfolio Effects and Externalities from Capital Controls

Author(s): Kristin Forbes, Marcel Fratzscher and Roland Straub

Publication Date: May 2012

Keyword(s): Brazil, capital controls, emerging markets, externalities, mutual funds, portfolio effects, signalling and spillovers

Programme Area(s): International Macroeconomics

Abstract: We use changes in Brazil?s tax on capital inflows from 2006 to 2011 to test for direct portfolio effects and externalities from capital controls on investor portfolios. The analysis is structured based on information from investor interviews. We find that an increase in Brazil?s tax on foreign investment in bonds causes investors to significantly decrease their portfolio allocations to Brazil in both bonds and equities. Investors simultaneously increase allocations to other countries that have substantial exposure to China and decrease allocations to countries viewed as more likely to use capital controls. Much of the effect of capital controls on portfolio flows appears to occur through signalling (i.e. changes in investor expectations about future policies) rather than the direct cost of the controls. This evidence of significant externalities from capital controls suggests that any assessment of controls should consider their effects on portfolio flows to other countries.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8979

Bibliographic Reference

Forbes, K, Fratzscher, M and Straub, R. 2012. 'Bubble Thy Neighbor: Portfolio Effects and Externalities from Capital Controls'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8979