currency, monetary-policy, international-trade, trade-finance, brazilThe Brazilian government has just created new taxes on financial transactions, notably on export finance. The stated goal is to lower the flow of money into Brazil, in order to decrease the value of the Brazilian real against the US dollar, and in turn make Brazilian companies more competitive.
And the Financial Times beyondbrics team blogged about Brazil’s second wave of response to what it described as the international “currency war”, saying:
On Thursday, Brazil’s government extended the 6 per cent IOF transactions tax to foreign borrowing of up to three years. Previously, the tax had only applied to loans with maturities of less than two years. … First, the central bank used a reverse currency swap, then it bought dollars on the spot market
This followed on from the first wave of currency war, in 2010
According to standard international economics theory, should this approach succeed? What would be the mechanism by which a tax on money inflow lower the value of a currency?
I have in mind the following: a tax on foreign-currency borrowing would increase the incentive to saving in Brazil, and decrease the incentive to borrowing. Therefore domestic demand should decrease, lowering the level of economic activity. This is not what the government has in mind. Does there exist a more direct mechanism by which the new taxes would lead to currency devaluation?
There were no answers to this question.
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