Capital Controls Work: Lessons From Brazil

Losing access to capital markets is a major problem for any market, but a flood of foreign capital creates its own problems as prices go up and EM exporters become less competitive and the prospect of the hot money flowing out just as quickly can destabilize a fragile economy. But countries can defend themselves with capital control rules and, according to new research, they may be able to fine tune their response by targeting different types of capital. “There is a significant decline in cumulative abnormal returns for Brazilian firms following the imposition of capital controls on foreign portfolio inflows…