Welfare Effects of Capital Controls

This paper studies the effect of capital controls on misallocation and welfare in an economy with financial constraints. We build a general equilibrium model with heterogeneous firms, financial constraints and international trade and calibrate it to the Chilean economy. Since high-productivity and exporting firms need to borrow more to reach their optimal scale, capital controls that tax international borrowing hit them harder. As a result, misallocation increases relatively more for this group of firms, and for young firms that are still trying to reach their optimal scale. In terms of welfare, the model predicts a sizable aggregate loss of 2.39 percent when capital controls are introduced, with welfare decreasing twice as much for high-productivity firms. We empirically corroborate the main insights in terms of misallocation obtained from the model using Chilean manufacturing firm data from 1990 to 2007.

Bibliographic Details

Main Author:	Inter-American Development Bank
Other Authors:	Eugenia Andreasen
Language:	English
Published:	Inter-American Development Bank
Subjects:	International Trade, Taxation, Financial Friction, Exporting Firm, Interest Rate, High-Productivity, Capital Control, Export Activity, F41 - Open Economy Macroeconomics, O47 - Empirical Studies of Economic Growth • Aggregate Productivity • Cross-Country Output Convergence, F12 - Models of Trade with Imperfect Competition and Scale Economies • Fragmentation, International trade;Financial Frictions;welfare;Capital controls;Misallocation,
Online Access:	http://dx.doi.org/10.18235/0003307 https://publications.iadb.org/en/welfare-effects-capital-controls
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