Bubble Thy Neighbor: Portfolio Effects and Externalities from Capital Controls

Social Science Research Network, 2012

117 citations recorded by the source corpus.

We use changes in Brazil's tax on capital inflows from 2006 to 2013 to test for direct portfolio effects and externalities from capital controls on investor portfolios. We find that an increase in Brazil's tax on foreign investment in bonds causes fund managers to significantly decrease their portfolio allocations to Brazil in both bonds and equities. Fund managers simultaneously increase allocations to other countries that have substantial exposure to China and decrease allocations to countries viewed as more likely to adjust their capital controls. Much of the effect of capital controls on portfolio allocation 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.

Subfields: Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/c19b3413f5743564dc5e7c94107bc211fe3647cf

Citations in the corpus

• Capital controls in Brazil: effective? (2016, unknown): “Forbes et al. (2012) survey foreign investors, and equity investors stated that most of the recent capital controls in emerging markets were so small that they did not materially affect their portfolio allocations.”
• WHAT DRIVES CAPITAL FLOWS TO EMERGING MARKETS? A SURVEY OF THE EMPIRICAL LITERATURE (2018, unknown): “For example, some authors have examined how policy measures such as capital controls affect the subsequent volume and composition of capital inflows (e.g., Montiel and Reinhart 1999; Forbes et al. 2012).”