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Endogenous Foreign Capital Flow in a CGE Model for Brazil: The Role of International Reserves

Author

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  • Wilfredo leiva Maldonado
  • Octávio Augusto Fontes Tourinho
  • Marcos Valli

Abstract

Neste artigo admitimos que o fluxo de capital externo para o Brasil subordina-se auma decisão de investimento cujo nível de risco depende da taxa esperada de perda dereservas internacionais. Isso foi motivado pela estimação que fazemos de uma relaçãoempírica entre essas duas variáveis que é válida para períodos em que não há crise debalanço de pagamentos. Essa relação foi então introduzida em um modelo estático deequilíbrio geral aplicado, um CGE, que havia sido anteriormente desenvolvido noIPEA para o Brasil, para produzir uma versão com fluxo de capital externo endógeno.Depois de ajustar a calibragem do ano-base do modelo (1998) para levar em conta ainclusão dessa equação nele, o artigo compara a resposta das duas versões do modelo àsimulação da implementação de dois acordos de livre-comércio: o Alca e o acordocom a União Européia. A principal conclusão é que a endogeneização do fluxo decapital externo amplia o efeito simulado sobre a economia real desses acordos de livrecomércio. In this paper we model foreign capital flow to Brazil as stemming from an investmentdecision that whose risk depends on the expected rate of loss of foreign reserves. Thismotivates the estimation of an empirical relationship between these two variables thatis valid for ?normal? periods (when there is no foreign exchange crisis) which is usedto calculate the capital flow associated with a given expected rate of foreign reservesloss. This empirical relationship is then introduced in a static General EquilibriumModel for Brazil which has exogenous foreign capital flow and follows a relativelystandard specification, to produce a version of it with endogenous capital flow. Afteremploying the inverse of the estimated relationship to calculate the differencebetween the expected and the realized values of the reserve loss in 1998, and using itto adjust the base year data, we recalibrate the model and compare the response of thetwo versions of the model to a simulation of the implementation of two free tradeagreements: with the Americas (ALCA) and with the European Union. The mainconclusion is that the inclusion of endogenous foreign capital flow in the modelsignificantly amplifies, and in some cases changes, the real effects of these free tradeagreements.

Suggested Citation

  • Wilfredo leiva Maldonado & Octávio Augusto Fontes Tourinho & Marcos Valli, 2004. "Endogenous Foreign Capital Flow in a CGE Model for Brazil: The Role of International Reserves," Discussion Papers 1042, Instituto de Pesquisa Econômica Aplicada - IPEA.
    • Handle: RePEc:ipe:ipetds:1042
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    References listed on IDEAS

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    1. Iwan J. Azis, 2000. "Simulating economy-wide models to capture the transition from financial crisis to social crisis," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 34(2), pages 251-278.
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