Developing countries' changing nature of financial integration and new forms of external vulnerability: the Brazilian experience

This article argues, using the example of Brazil, that the changing nature of developing and emerging countries' (DECs) financial integration has created new forms of external vulnerability, causing large and volatile capital and exchange rate movements. Despite sound fundamentals and a substan...

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Bibliographic Details
Published in:Cambridge journal of economics 2015-09, Vol.39 (5), p.1281-1306
Main Authors: Kaltenbrunner, Annina, Painceira, Juan Pablo
Format: Article
Language:English
Subjects:
Brazil
Capital flow
Capital movement
Developing countries
Financial integration
Financial systems
Foreign exchange rates
Foreign investment
International finance
Latin America
LDCs
Studies
Volatility
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Summary:This article argues, using the example of Brazil, that the changing nature of developing and emerging countries' (DECs) financial integration has created new forms of external vulnerability, causing large and volatile capital and exchange rate movements. Despite sound fundamentals and a substantial reduction in its traditional external vulnerabilities, the Brazilian real has been one of the most volatile currencies over recent years. The article argues that this has been the result of the surging exposure of foreign investors in an increasingly complex set of very short-term domestic currency assets. Following a Minskyan analysis, we demonstrate that the changing nature of Brazil's external vulnerability confirms both the inherent and endogenous instability of international capital flows and DECs' subordinate role in the international financial system. We conclude with policy recommendations to reduce DECs' external vulnerability sustainably.
ISSN:0309-166X
1464-3545
DOI:10.1093/cje/beu038