Controls of capitals in emergent economies



Capacity Utilization, External Debt Capital Controls in Emerging Economies

An analysis based on computational simulations *

Inácio Guerberoff **

José Luís Oreiro***

FIRST DRAFT

Abstract: This article analyzes the impact of capital controls over time-path of selected macroeconomic variables, as well as the effects of these controls over the economy’s level of external fragility. First of all, we present a Post-Keynesian Macroeconomic Model, which introduces capital controls as a choice variable of economic policy. For computer simulation, we have selected a set of plausible values – in economic terms - for the structural parameters of the model. Based on these parameters, we analyzed the dynamic behavior of capacity utilization, external debt as a ratio of GDP, net exports as a ratio of GDP and level of domestic rate of interest under different initial conditions for the level of external debt. After that, we analyze the degree of economy’s fragility to external shocks as, for example, variations in the level of international rate of interest and in the level of international trade flows. Based in this framework, we conclude that capital controls may contribute to reduce the volatility of external debt (as a ratio of GDP) to exogenous shocks, but amplifies the effects of these shocks over the level of capacity utilization. In this context, desirability of capital controls is conditional to society’s preferences over capacity utilization and external debt volatility. If society has a stronger aversion to output volatility than to external debt volatility, capital controls should not be used. However, if society has a stronger aversion to external debt volatility than to output volatility, capital controls can improve social welfare. Since emerging economies like Brazil and Argentina have a long lasting problem of external constraint to economic growth, this last case seems more relevant for these economies.

Key Words: Capital controls, post keynesian economics, macroeconomic dynamics.

March, 2004

“It is ideas, not vested interests, which are dangerous for good or evil” (J.M.Keynes)

1 – Introduction

The discussion on capital controls in Brazil and in the world has been made, usually, based with a ideological bias – it is argued, for example, that its adoption would represent, for the country that adopts them, an exclusion from international capital flows and, consequently, of the benefits of the process of financial globalization – or with a purely technical bias, which advocates the impossibility of an effective implementation of any form of controls, given the capacity of the investors to by-pass the established regulations (cf. Edwards, 1999). Such discussion does not seem to take in consideration that some recent experiences of capital controls had reached – in some degree – success in some countries, as Chile and Malaysia, as recognized by a recent study made by technicians from the IMF (Ariyoshi etal, 2000). In other words, the arguments against the intervention of the State in the movements of capitals between frontiers seem to be supported more in preconceptions of ideological nature than in solid theoretical and empirical arguments.

Nowadays, considering the typical financial/exchange instability of the recent world-wide experience, even conservative agencies, like the IMF, accepts the possibility, in certain circumstances, of the temporary use of certain types of capital controls. Even in the mainstream of economics profession, many economists have criticized the benefits of the process of financial liberalization (Tobin, 1978; Rodrik, 1998; Stiglitz, 1999 and 2000) and defended the introduction of capital controls to increase the autonomy of the monetary politicy and to reduce the external vulnerability of the emerging economies.

In the Brazilian case, the recent experience of exchange instability, since the Asian crisis, has disclosed the difficulties of manegement of the macroeconomic policies in a country with high dependence of foreign capitals, weak currency and an open capital account. A new style of economic policy becomes necessary to create conditions for a sustainable and financially stable economic growth. The adoption of some mechanisms of capital controls may help in the implementation of this policy, together with others.

Even though the reasons presented from its defenders may be correct reasons for the introduction of capital controls, a deeper analysis on the desirability of them would demand the construction of a complete macroeconomic model, where the effect of capital controls on variables like the degree of capacity utilization, external indebtedness, net exports and etc could be evaluated. In fact, the debate on capital controls has been lead sometimes based in a purely empiricist bias, where the effect of capital controls on the macroeconomic performance of selected countries are availed with little or no theoretical content at all; sometimes based in a simple theoretical framework, in which the secondary and/or of long-run effects of these controls are not evaluated.

In this context, the objective of this article is increase our understaning of the macroeconomic effects of the introduction of capital controls through the construction of a complete macroeconomic model. The model that we will present will be used to answer two basic questions:

a) What is the impact of capital controls on time path of selected economic variables like degree of capacity utilization, external indebtedness as ratio of the GDP, domestic rate of interests and net exports as a ratio of GDP?

b) The capital controls can reduce the external fragility of the economy, that is, can reduce the sensitivity of the economy to external shocks as, for example, variations of the international rate of interests or variations in trade flows?

To achieve this target, we will proceed in two stages. Initially we will specify the structure of the theoretical model from which this analysis will be lead, verifying the conditions of existence and stability of the positions of long-run equilibrium. This verification will be made not only from the qualitative point of view, but will also be complemented through computer simulation. The initial objective of these simulations is to deduce a set of economically reasonable values for the parameters of the structural equations of the model.

In the second stage, we will use the values deduced in the first stage (i) to compare the trajectory through time of economic variables under different levels of capital controls: no controls and partial controls; (ii) to analyze the sensitivity of the economy to external shocks under different levels of capital controls.

The present article is divided in four sections including this introduction. In section 2 we will present the basic structure of the theoretical model used through out this article. Section 3 is dedicated to the simulation exercises. The conclusions are in section 4.

2 – External indebtedness and Capital controls in a post-Keynesian macroeconomic model.

The model that will be developed in the present section is an extension of the model presented in Oreiro (2004). The original version of the model presents a economy in the which (i) investment in fixed capital is positively influenced by the ratio of external debt to GDP, due to the positive effect of a greater diversity finance sources over borrower´s risk ; (ii) perfect capital mobility in the sense of Mundell (1968) and Fleming (1962), i.e it is valid the so-called "uncovered interest rate parity"; (iii) the nominal exchange rate is fixed and; (iv) the country-risk is endogenous, varying with the external debt as ratio of the GDP.

In the version of Oreiro´s model presented here, we will consider an economy that has capital controls in the form of taxes over entry and/or exit of financial applications of the country.

2.1 Structure of the model and the short-term equilibrium

Let us consider an economy where the companies operate in oligopolized markets, determining their prices based in a fixed mark-up over direct production costs, composed by labour costs and imported materials. (cf.Taylor, 1983). So we have:

[pic]

Where: p is the domestic price level, w is the rate of nominal wage, p* is the international price level, e is the nominal exchange rate, b is labour requirement per unit of output, [pic] is the requirement of imported raw materials per unit of output and ( is the rate of mark-up.

Let r be the rate of profit and u the degree capacity utilization. It can be demonstrated that the profit rate is given by:

[pic]

The goods market is in balance when the condition below is true:

[pic]

Where: pC is the nominal value of the expenses in consumption, pI is the nominal value of the expenses in investment, pE is the nominal value of the net exports and pX is the nominal value of the real income.

We will assume the existence of two social classes – capitalists and workers – which differentiates among thenselves based on the origin of their income – profits or wages – and based on the propensity to consume out of available income. In this context, we will assume that the workers "consume everything that they earn" so that its propensity to consume is equal to one. [1]On the other hand, the capitalists consume a fraction cp of its incomes (which are constituted solely of profits), saving a fraction sp= (1-cp) of its income. This way, the nominal value of the expenses of consumption is given by:

[pic]

Substituting (4) in (3) we have, after some algebra, that:

[pic]

The investment function is composed by three elements: an autonomous component ([pic]), one that depends on the difference between the rate of profit and rate of interests ([pic]) and finally a component that depends on the external indebtedness as ratio of GDP ([pic]). We will assume that an increase of the external indebtedness as ratio of the GDP will result in an increase less than proportional in investment, that is, (z *. In other words, the equilibrium with high indebtedness will be stable if z * < z **. For this to occur the following condition must be true:

[pic]

Placing g in evidence, we have:

[pic] (28)

For the equilibrium with high indebtedness to be stable is necessary that the rate of growth of the real product be bigger than a certain critical level g*, which depends, among others variables, on the level of capital controls. If this condition is not true, the equilibrium with high indebtedness will also be unstable.

2.4 – Analysis of Stability in the case where ( ( (.

We will now abondon the hypothesis that the goods market adjusts slowly to the situation of excess of demand, that is, we will assume that the degree of capacity utilization is always equal to its short-run equilibrium value. This way, the dynamic system previously presented will be reduced to only one differential equation – the expression (19) – where the dynamics of the external indebtedness depends only on the value assumed from the variable [pic], since the profit rate will have assumed its value of balance, being a nonlinear function of [pic] in accordance with the equation (12).

In this context, the analysis of the stability of the system is simplified. This happens because the economy will be operating continuously on the locus [pic] and its dynamic will be given only from the equation (19). If the economy operates in a point of the lócus [pic]above the locus [pic], the combination external profitability-indebtedness will be such that the external debt as ratio of the GDP will increase through time (Figure 3). However, if the economy operates in a point over the locus [pic] below the locus [pic], then the combination external profitability-indebtedness will be such that the external debt as ratio of the GDP will diminish through time. This way, the equilibrium with high indebtedness will be stable, while the equilibrium with low indebtedness will be unstable. This means that if the initial level of external indebtedness is higher than the one of the balance with low indebtedness, the economy will converge to a position of long-run equilibrium characterized by high external indebtedness.

[pic]

Figure 3 - Dynamic of long stated period with instantaneous adjustment in the goods market

3 – Computational simulation of the Theoretical Model.

In this section we will use the differencial equations of the theoretical model developed in the previous section to simulate in a computer the possible time paths of some relevant economic variables: profitability, external debt as ratio of the GDP, domestic interest rate and net exports as ratio to GDP.

3.1 – The simulation methodology

The simulation of a economic model makes possible to analyze some practical properties of the model, as well as verify the economical plausability of the dynamics studied in the qualitative analysis.

There are two ways to develop an economic simulation. In the first one, using a methodology that we will call bottom-up strategy, a computational model with sights to the simulation is constructed. The behavioral functions and some parameters are defined and drawn in the modeling process for the specific objective of computational simulation. In general we get more precision in the resulting time series and more flexibility of the behaviors of the system, but we lose analytical possibilities. The bottom-up strategy is used when we want to take advantage of the flexibility of the computational language in comparison to the algebraic one, as conditional behaviors, differentiated repetitions in diverse functions, among other behaviors that could not be reproduced through the traditional algebra (or it would be unnecessarily complex to use).

The second way uses a methodology that we will call top-down strategy. The objective is to adapt an existing economic model to a computer simulation. Without modifying the equations of the model, its behavior is tested under real or reasonable parameters, and is verified the behavior in the time of the economic variables. Because it is a numerical analysis of a qualitative work, sometimes we conclude that certain conditions that were theoretically possible in the qualitative analysis are found to be impossible or non-realistic through the computational simulation. This way, the top-down strategy is an important complement to the qualitative analysis, because it allows us to have a clearer idea of the relevance of the theoretical conditions in the which certain behaviors can or not be observed. Another result given by the quantitative analysis with this method is the analysis of the reasonability of the dynamics observed in the qualitative models, like convergent cycles and oscillations.

The methodology used in this work is the second. Starting with a theoretical model written in mathematical form, we use reasonable numbers for the parameters of the behavioral functions of the model. [5]Some of these parameters, however, are of an unknown magnitude. For these parameters, we use the methodology of Samuelson´s correspondence principle, that is, we use the values that are needed for the time path to be realistic.

For example, attributing values for the "observable" parameters of the model based on what seems reasonable for a country like the Brazil, and adjusting the values of the parameters for which no a priori estimate can be made based on the conditions of existence of the equilibriums with low and high indebtedness; we verify that the stability of the equilibrium with high indebtedness in the case where [pic] would only be possible with unreasonable values for the parameters of the model. In effect, the attendance of the condition (28) demands that the rate of growth of the real GDP to be significantly bigger that 6 %. Still, if we add the necessary condition that the equilibrium point with high indebtedness to be situated in the region between [pic] and [pic], we need a rate of growth of the GDP of 24% a year ! This way, we have a model without stable equilibrium for reasonable parameter values.

The economists, usually, have a great discomfort with equilibrium positions that are not stable. This discomfort is based on two positions. The first one, defended by Samuelson (1945), establishes that an unstable equilibrium is a transitory position and, as such, not observed empirically. The second, defended by Blatt (1983), establishes that (unbounded) instability generates a dynamics such that the endogenous variables of the economic system converges to an impossible state in a finite interval (even, in some cases, very long) of time.

This reasoning, however, does not seem enough convincing to justify the abandonment of a theoretical model in which the equilibrium positions are not stable. Let us consider, for example, the theoretical literature that deals with the issue of the hiper-inflation. This literature is based on models of representative agent with infinite horizon of planning, in the which the currency is the only asset, that is, the only way in which the representative agent can carry purchase power in the long-run (cf. Blanchard & Fisher, 1989 pp.239-245).

This class of models admits the existence of a position of stationary in which the real value of the monetary balances is constant through time. This equilibrium is, however, unstable: if the real value of the monetary balances gets lesser of that of equilibrium, then the economy will enter in a dynamic path such that this value will converge to zero in a finite interval of time. That is, the value of the currency will tend to zero in the long-run. This position is clearly impracticable in the economic point of view, since it means the reversion of exchange technology to direct barter, what it is not compatible with the high degree of specialization and division of the work in a capitalist economy. However, this instability is not seen as an anomaly or something that puts down against the utility of this class of models. This is because hiper-inflation, even being a rare event, is not a phenomenon impossible to occur. In fact, in century XX we can list at least half dozen of historical experiences of hiper-inflation.

Based in this analogy, we can affirm that the analytical utility of a model that presents unstable equilibrium consists exactly in showing the necessity of the accomplishment of structural reforms, led or not by government, with the objective to stabilize the economic system, thus preventing the emergency of economically impracticable states in the long-run.

In the simulations that follows, we will analyze the behavior of the endogenous variables in an interval of time short enough to prevent that these variables assume impossible or unreasonable values. The objective is to make what we will call comparative dynamics, that is, we will compare the trajectories through time of the endogenous variables that can be gotten from different values of the parameters on the model. A particular interest will be devoted to the comparative dynamics of the capital controls. In other words, we will compare the trajectories of the diverse endogenous variables that can be gotten from different values for the level of the capital controls.

3.2 – The process of choice of the values of the parameters.

Taking as base the principle that the values of the parameters must be numbers that are reasonable under economic point of view, and considering that the economy in analysis is an emerging country, that possess a great (but not perfect) mobility of capitals and a high external indebtedness; we considered the following set of parameters in the simulation exercises:

|Parameter |Description |Value |Parameter |Description |Value |

|[pic] |Propensity to save of the capitalists |0.15 |[pic] |Autonomous determinant of net exports|0.1 |

|[pic] |Profit share |0.5 |[pic] |Sensitivity of the imports to the |0.33 |

| | | | |activity level | |

|[pic] |International interest rate |0.02 |[pic] |Rate of decrease of the investment |0.2 |

| | | | |with indebtedness | |

|[pic] |Risk premium of countries with |0.03 |[pic] |Target interest rate |0.03 |

| |investment grade | | | | |

|[pic] |Sensitivity of risk premium to the |0.2 |[pic] |Unitary requirement of raw materials |0.5 |

| |total debt | | | | |

|[pic] |Autonomous determinant of the |0.067 |[pic] |Real exchange rate |0.2 |

| |investment | | | | |

|[pic] |Sensitivity of the investment to the |0.6 |[pic] |Growth rate of the GDP |0.035 |

| |difference between interest and | | | | |

| |profitability | | | | |

|[pic] |Sensitivity of the investment to the |0.1 |[pic] |Speed of adjustment in the goods |0.1 |

| |total debt | | |market | |

Table 1 - Parameters of simulation

In Table 1 the values of the parameters[pic] [pic], [pic] [pic], and [pic] had been chosen in a way to allow the existence of two positions of long-run equilibrium, such as in the developed theoretical model in the previous section. The other parameters had been chosen based on reasonable values for an emerging economy as, for example, the Brazilian economy. Using k = 0,1 get the result presented in Graphic 4 below at the result presented in figure 4:

[pic]

Figure 4 - Curves with the parameters used in the simulations and k=0.1

In Figure 4, we see the existence of two equilibriums. In the first one, with low indebtedness, the relation debt/GDP is equal to 0.75% and the profitability is 16,65%. In the second, with high external indebtedness, the relation debt/GDP is of 52,75% and profitability of 7,03%.

3.3 Compared dynamics for the case of ( < ( under different levels of capital controls

In the analysis of comparative dynamics we will use the values of the parameters defined previously (except the value of the capital control, k), and we will analyze the trajectory of the endogenous variables under two different scenarios for the initial value of the external debt as ratio of the GDP: 10% and 25% of the GDP (corresponding to z = 0.1 and z = 0.25). In each of these scenarios we will analyze the impact of different levels of capital controls (no controls: k = 0, or partial: k = 0.1) on the dynamics of the economic variables. It is good to note that the initial point corresponds to a situation of equilibrium in the goods market.

Scenario 1: Low Initial Indebtedness

In figure 5 we observe that in the initial periods of the time path of the interest rate, the absense of capital controls generates a higher interest rate than the one than the one generated by a situation of partial capital controls. This happens because capital controls allows the Central Bank to fix an interest rate lower than the one that would prevail in a situation of perfect capital mobility. In fact, in t = 0 the domestic interest rate in a regime of no capital controls would be of 6,98% per period, while in a regime of partial capital controls, it would be 6,59% per period, with the parameters used in the simulation. This happens because the capital controls modifies the initial interest rate directly, as it can be seen in (8).

As time passes, however, this relation is reverted: the domestic rate of interests in a regime of absense of capital controls is lower than the one resulted in the other regime. This behavior is consequense of the dynamics of the degree of use of the productive capacity and the external indebtedness: because the domestic interest rate is lower in the initial periods in the case of partial capital controls than in the case of absense of it, the investment and the degree of use of the productive capacity will be higher in the first case. A bigger level of use of the productive capacity will generate a smaller value for the liquid exportations as ratio of the real GDP and generate, therefore, a faster accumulation of external indebtedness. This explanation is proven by the analysis of Figures 6, 7 and 8:

|[pic] |[pic] |

|Figure 5 - Interest rate |Figure 5 - Liquid exportations (E/X) |

|[pic] |[pic] |

|Figure 6 - External debt |Figure 7 - Profit rate |

Scenario 2 : High Initial Indebtedness

The dynamics of the interest rate under different levels of capital controls in the case where the initial level of external indebtedness is 25 % of the GDP is shown by Figure 9:

|[pic] |[pic] |

|Figure 8 - Interest rate |Figure 9 - Liquid exportations (E/X) |

|[pic] |[pic] |

|Figure 10 - External debt |Figure 11 - Profit rate |

As in the previous case, we observe here that in the initial periods of the simulation the interest rate is smaller in a regime of partial capital controls than in a regime of perfect capital mobility The difference with the previous case is in the initial level of the interest rate in both cases. In the case of no capital controls, the initial value of the domestic interest rate is 10% per period. In a regime of partial capital controls the value is only 9.3% per period.

In figure 10 we observe the time path of the net exports under different levels of capital controls. We can see that net exports as ratio of the GDP on both regimes keeps a smaller deficit, in comparison with the case of low initial indebtedness. The reason for this apparently "good behavior" of the commercial balance is due to the effect of the higher interest rate on the degree capacity utilization. Because the country-risk is higher in the case where z(0) = 0,25 than in the case where z(0) = 0.1; the interest rate will be higher in the first case that in the last one. This way, the investment and, consequently, the degree of capacity utilization will be lower in scenario 2 than in scene 1. As net exports are inversely related to the degree of capacity utilization, the trade balance will be higher in the scenario with high initial indebtedness than in the scenario of low initial indebtedness.

3.4 Comparative statics for the case where ( - > ( for different conjunctural scenarios

As seen in section 2.4, relaxing the assumption of slow adjustment in the goods market, we have the occurrence of stability in the equilibrium with high indebtedness. In fact, when running the dynamic simulation with the same initial parameters of the analysis of section 3.3 and using the instantaneous adjustment in the goods market, we verify a convergence with low oscillation:

[pic]

Figure 12 - Profitability in time

Figure 13 shows only the behavior from t=20 in order to point the small damped oscillations that occur due to the adjustment caused by the dynamics of the external indebtedness (equation (19)).

We can analyze the different positions of equilibrium where economy is taken in different conjunctural and structural situations.

The tables in page 21 shows the results of these simulations. Each table analyzes the impacts of variations in one determined exogenous variable. Table 2, for example, shows the values of equilibrium in three scenarios: the standard scenario for international rate of interest used in the work ([pic]), an increase of 0,5 percentile point ([pic]) and a fall of 0.5 percentile point ([pic]). In each one of the three cases, the table informs the equilibrium values of [pic] and [pic] in the cases of absence of capital controls ([pic]) and in the case of partial capital controls ([pic]). For example, when [pic] and there are partial capital controls the values of equilibrium of the profitability and of the indebtedness they are 5.87% and 57.24%, respectively.

The tables also shows the percentile variations in the endogenous variables in relation to the basic case (enhanced in the tables with the edge in boldface) in fields "[pic] and [pic]" and "[pic] and [pic]". The variations with subscript 1 (for example[pic]) relate to the first case of variation (that is, the value to the right of the basic case), and with subscript 2 (for example[pic]) relates to the second case of variation. For example, we can see in Table 3 that, when the independent value of the liquid exportations passes from [pic] to [pic] in the absence of capital controls, the equilibrium profit rate increases in 19,15%, and the equilibrium debt has a -38,37% fall.

Scenario 1 – Variations in the international rate of interest

We analyze the impact of a variation (up and down) of international interest rate ([pic]) in 0,5 percentile points. The results are presented in Table 2

We see here an interestning result: when the international interest rate increases the equilibrium profitability increases and the equilibrium debt decreases. It is important to stand out that we are analyzing an equilibrium position, and not instantaneous effects. At first, there is a reduction of the profitability (that has instantaneous adjustment). Because the profitability is smaller than the one that leads to the equilibrium of the debt, the economy enters in a trajectory of reduction of the debt and increase in profitability, that results in a smaller debt and a bigger profitability than the initial values.

Scenario 2 – Variations in trade flows

The variable of the model that reflects changes in international trade is[pic], the autonomous component of net exports, given that the term [pic] reflects imports, that are induced by variations in the degree capacity utilization.

The first comment that can be made on the results (see Table 3) is the huge impact of changes in exports over equilibrium values. This happens because the profitability that balances the goods market is more sensible to net exports than the one that balances the debt[6]. This behavior can be visualized in the comparative graph of the two situations (Figure 14).

[pic]

Figure 13 - Effect of reduction in the independent component of the liquid exportations

In a context of depression in international markets, the presence of capital controls improves the response of the level of activity to the new situation in the equilibrium. On the other hand, the reduction of the equilibrium indebtedness is smaller. In the case of an increase in exports, however, we observe the opposite. In section 3.5 we analyze these different behaviors under the perspective of the social welfare.

3.5 Welfare Analysis

The results gotten in the simulations on section 3.4 allowed the observation of relations of cause and consequence for qualitative analysis and conjunctural considerations. The variations verified while comparing the results in the presence and in the absence of capital controls were, however, non-conclusive. In cases like variation of the international rate of interest, the capital controls intensified the variation in the rate of capacity utilization, but on the other hand it attenuated the variation in the external indebtedness.

Results of the simulations for the case [pic]

| |[pic] |[pic] |

| |[pic] |[pic] |

| |[pic] |

We will assume that the cost of the volatileness on these variables for the society increses with their value. This means that an alteration of 2% in a variable has a social cost bigger than the double of the cost of a 1% alteration. We will call the weight that the society gives for the volatileness of the level of use of the productive capacity [pic] and for the volatileness of the external indebtedness [pic]. Our function of social cost is of the following form:

[pic] (31)

Welfare can be given by the negative of the social cost:

[pic] (32)

Joining (29) and (30) in (31) (remembering that, when taking a square leaves the need to use the module) and substituting in (31) we have the welfare equation that we will use:

[pic] (33)

We now analyze two cases of societies´s preferences: aversion to volatileness in the external indebtedness and aversion to volatileness in the capacity utilization.

| | |

|Welfare |Welfare |

| | |

| | |

|[pic] |[pic] |

|[pic] |[pic] |

| | |

|Variations in [pic] |Variations in [pic] |

|-0.11004 |-0.07608 |

|-0.10775 |-0.1699 |

| | |

|Variations in [pic] |Variations in [pic] |

|-1.90378 |-0.85847 |

|-1.71665 |-1.73347 |

| | |

|Table 4 - Aversion to volatileness in the external indebtedness |Table 5 - Aversion to volatileness in the level of capacity |

| |utilization |

Case 1: Aversion to volatileness in the external indebtedness

In this in case we take the following values for the parameters: [pic] and [pic].

The results shown in Table 4 show that, in a society with aversion to volatileness in the external indebtedness, a bigger capital controls increases welfare in variations of the international interest rate and in the external commerce.

Case 2: Aversion to volatileness in the level of capacity utilization

In this case we take the following values for the parameters: [pic] and [pic]. The results can be seen in Table 5.

In the case of society with aversion to volatileness in the level of capacity utilization, the absence of capital controls resulted in a bigger welfare in variations in all the analyzed exogenous variables.

4 – Conclusion

The present work had the objective of making a theoretical analysis of the impact of capital controls in an emerging economy. The methodology used to reach this objective was of analysis of results of simulation in computer of a theoretical model.

The results had shown that the effects of capital controls in a economy can be very complex.

In sections 3.3 and 3.4, for example, we saw that, in the initial periods of the dynamic analysis, the capital controls can increase the level of capacity utilization. Through time, however, this increase in the level of capacity utilization leads to a reduction of trade balance, that leads to an increase in external indebtedness and a reduction in the level of capacity utilization.

As the results relating to changes in the volatileness of the macroeconomic variables were not immediately conclusive, we have to made a welfare analysis that showed that the option for capital controls depends on the level of society´s aversion to the volatileness of different macroeconomic variables. In this context, if the society have a strong aversion to the volatileness of the external then capital controls will be preferable to a situation perfect capital mobility. However, if society have a strong aversion to the volatileness of the degree of capacity utilization, giving little value to the volatileness of the external debt then absence of capital controls will be the choice that maximizes the welfare of society.

This way, the choice between capital controls and capital mobility cannot be based solely on technical arguments, because it depends on social preferences.

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* Paper to be delivered at Congress of Economic Growth and Distribution.

** Graduate Student in Economics at Universidade Federal do Paraná, Curitiba, Brazil. E-mail: i@.br.

*** PhD in Economics at Universidade Federal do Rio de Janeiro, Rio de Janeiro, Brazil and Associate Professor of Economics at Universidade Federal do Paraná, Curitiba, Brazil. E-mail: joreiro@sociais.ufpr.br. Web-mail: joseluisoreiro.ecn.br.

[1] Or either, its propensity to save is equal the zero.

[2] Regarding the micro foundations of this investment function see Oreiro (2004).

[3] This assumption is necessary since the model presented here does not possess a equation capable to determine the rate of growth of GDP. The usual assumption of post-Keynsian growth and distribution models is that the rate of growth of capital stock is equal to the rate of growth of income. However, as capacity utilization is an endogenous variable in this model, then this equality is only correct steady-state. Out of steady-state, the degree of capacity utilization can chenge over time, making the rate of growth of real income to be greater or smaller than the rate of growth of capital stock.

[4] We are assuming that the balance of the invisible balance not-factors is equal the zero.

[5] This attribution is made on the basis of the existing countable estimates regarding the values of the same ones.

[6] An alteration of [pic] in [pic]modifies [pic] of balance in [pic] in [pic], and [pic] in. [pic]As [pic] e [pic], we have that [pic], resulting, of this form, in. [pic]

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