2. (Effectiveness of Capital Controls). Between October 2009 and March 2012 Brazil imposed a number of capital control taxes to reduce capital inflows into Brazil. After March 2012 those restrictions were removed. The cupom cambial, ifup icupom, is the 360-day interest rate of U.S. dollar deposits inside Brazil. It is defined as 1 + icupom = (1 + it) F.' Et (7) where &, is the spot exchange rate (that is, the Brazilian reais price of one U.S. dollar), Ff is the 360-day forward exchange rate of U.S. dollars, and i, the 360-day nominal reais interest rate in Brazil. Let it denote the 360-day U.S. dollar LIBOR rate and define the spread as spreadt = 2t ;cupom _ it . (8) Figure 1: Brazilian Cupom - LIBOR spreadt, 2009-2012 5 07/08/2011 Tighter Limit FX Gross Position 11/19/2009 1/6/2011 Conversion Limit FX 07/27/2011 of ADRS 10/5/2010 Gross Position Tax on 4% tax on Derivatives Fixed Income 10/20/2009 09/01/2011 3 Intial 10/18/2010 Surprise Control 6% tax on rate cut 03/01/2012 Fixed Income Tax on Loans (