Tuesday, October 20, 2009
A tax on capital inflows in Brazil
Brazil just announced a 2% tax on foreign investment in equity and fixed income. While some market "experts" may be talking about credibility once again, this is good news because it will help to increase Brazil's policy space. It is not clear, however, whether it will stop the appreciation of the real or not...
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2 comments:
Paradoxically, Brazil's expansionary fiscal policy wouldn't be effective under flexible exchange rate.
This indeed wouldn’t help much to prevent the Real from evaluating, according to what Brazil’s Central Bank Governor has been saying for the last years. His point (restated in a recent lecture in Oxford) is that the cause of Real’s evaluation is not foreign portfolio investment, but direct investment and, as far as I know, FDI will not affected by the new tax.
I could find the figures only for FDI (33,7 billion dollars in 2007 and 43,8 bi in 2008), but I couldn’t find numbers for portfolio investment to verify which is larger and what would be the difference. So, we still have to trust on Mr Meirelles...
But regardless the effectiveness of the measure in the exchange rate, it’s welcome in the sense that it will increase tax revenue in Brazil (though I guess this increase will not be very significant)
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