Capital account regulation in Brazil: An assessment of the 2009-2013 period

Abstract

Brazil was one of the emerging countries that had a stronger trend of currency appreciation from the 2nd quarter of 2009 to July 2011. Under this context that can be understood the implementation of capital account regulation (CAR) after 2009, which was complemented with another kind of regulation, the so-called FX Derivatives Regulation (FXDR). This paper shows that only when Brazilian government adopted these two kinds of regulations simultaneously, the policy effectiveness increased in terms of protecting the Brazilian currency from upward pressures. Brazilian experience also highlights that it is not possible to establish a hierarchy between temporary instruments to manage capital flows and permanent prudential measures, as supported by the IMF current approach.

Capital Account Regulation and National Autonomy: The Political Economy of the New Welfare Economics

“…5 In any case, theoretically, the adoption of a floating exchange rate regime would still enable monetary policy independence in a financially integrated world. The issue for DEEs is that their currencies and the assets denominated in their currencies occupy the position of risky assets in financial markets portfolios, which is reflected in a procyclical and volatile demand that is transmitted to exchange rate movements (Andrade and Prates 2013;Kaltenbrunner 2018;Kaltenbrunner andPainceira 2015, 2018;Paula, Fritz and Prates 2017;Prates and Paula 2017; for an IPE perspective on the currency hierarchy, see Cohen 2015Cohen , 2018. In this context, the accumulation of international reserves serves to limit the exchange rate flexibility, either through direct intervention of the monetary authority or simply due to a gigantic volume of international reserves boosts creditors' confidence on the DEEs' economic health.…”

Taming Foreign Exchange Derivatives Markets? Speculative Finance and Class Relations in Brazil

“…FX futures became the main instrument for carry trades because of the peculiar institutional structure of the currency market in Brazil: over time, a ‘regulatory asymmetry’ developed between the FX spot market and the FX derivatives market (Prates and Fritz, ; Prates and de Paula, ; Rossi, ). Simply put, the former has gradually become much more regulated than the latter.…”

“…This led to a configuration in which the FX derivatives markets became ‘over‐developed’ (in terms of depth and liquidity) in comparison to the spot market (Interviews 7, 8 and 9). Consequently, FX futures operations became the most important factor in the determination of the exchange rate, as many studies have pointed out (Cunha and van der Laan, ; Kaltenbrunner, ; Prates and de Paula, ; Rossi, ; Ventura and García, ). As a result of the FX futures operations of foreign institutional investors (especially hedge funds) and Brazilian institutional investors and non‐financial companies, the BRL appreciated strongly between 2009 and 2012.…”

“…As a result of the FX futures operations of foreign institutional investors (especially hedge funds) and Brazilian institutional investors and non‐financial companies, the BRL appreciated strongly between 2009 and 2012. The appreciation was compounded by the operations of resident banks, which made money out of arbitrage operations between the futures and the spot market: resident banks bought cheap dollars in futures market and sold them on the spot market or to the central bank, which caused additional appreciation of the exchange rate (Carneiro and Rossi, ; Prates and de Paula, : 120).…”

“…Nominal Daily Exchange Rate and Key Policy Interventions (September 2008–May 2014) Sources : Author, based on data from IPEA; Cunha and van der Laan (); Prates and de Paula (); da Silva and Harris ().…”