Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/237504 
Year of Publication: 
2021
Series/Report no.: 
IDB Working Paper Series No. IDB-WP-1229
Publisher: 
Inter-American Development Bank (IDB), Washington, DC
Abstract: 
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.
Subjects: 
Capital controls
Welfare
Misallocation
Financial frictions
International trade
JEL: 
F12
F41
O47
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper

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