For a partially convertible currency: A critique to Arida and Bacha

ABSTRACT

The objective of this article is to do a critical evaluation of Arida-Bacha hypothesis that a high-risk premium on external and internal Brazilian debt is the consequence of the limited convertibility of Brazilian capital account. It is argued in the present paper that this hypothesis is not grounded neither in theoretical or empirical basis. The theoretical literature of capital account convertibility establishes no relation between capital controls and risk-premium on internal or external debt. The recent experience of the Brazilian economy shows that real interest rates are still too high, despite the growing liberalization of the capital account. Econometric tests involving risk-premium on Brazilian external debt and indexes of capital account liberalization developed by Cardoso and Goldfjan (1998) shows that these variables do not co-integrate. Thus, it is not possible to establish the existence of a long-run relationship between capital account liberalization and risk-premium, as would be expected if Arida-Bacha hypothesis was correct.

KEYWORDS:
Interest rate; risk premium; convertibility of the real; liberalization