Short and long-run relations between capital netflows and the differential between American and Brazilian interest rates

This paper aims to investigate the possible cointegration of the difference between the Brazilian and American real interest rates and the Brazilian capital netflows. Our main methodology is that of cointegrating processes, using spectral analysis. The results indicate the presence of fractional cointegration between the two time series. A 1 p.p. increase in this interest rate difference drives more than US$ 990million in capital netflows directed to Brazil. To the best of our knowledge, this is the first attempt to use fractional cointegration to understand the relationship between these two variables.