Net Capital Flow Variation as a Cause of Macroeconomic Instability

Conducting a theoretical analysis a historical overview and an empirical investigation as well in order to verify whether net capital flow variations can cause economic fragility – and crisis in the worst case scenario – on Latin American economies (Brazil Chile and Mexico) the present study concluded that capital flows from developed countries or “capital exporters” to developing economies in order to try to obtain a better payoff in the potential risk versus expected rate of return relationship. Thus the recent crises in Latin America were not a result net capital flow variations but by the fact that the capital available from International Markets was taken in order to finance consumption and not to build up a consistent economic environment the misuse of capital did lead to an economic environments characterised by overlending policies and appreciated real exchange rates under the shadows of a weak banking system. Based on the econometric analysis results we concluded that: i. macroeconomic fragility is due to macroeconomic performance; and ii. capital controls can be established by countries liberalizing its capital accounts as a way to protect the economy.