Country risk endogeneity, capital flows and capital controls in Brazil

ABSTRACT The main goal of the paper is to analyze the relationship between capital flows, country risk, capital controls and interest rate differential in Brazil since the mid of 90s. We know how controversial is the role and the effectiveness of capital controls during episodes of crises, and how emerging countries can be trapped in a vicious circle expressed through the behavior of two crucial variables: the country risk and the interest rate. Empirical results suggest that interest rate differential is endogenous to country risk, mainly explained when we consider the existence of a probability of default in the context of a high public debt.