Welfare effects of capital controls

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IDB Working Paper Series ; No. IDB-WP-1229

Classification and Topics

• Classification: Wirtschaft ; Models of Trade with Imperfect Competition and Scale Economies; Fragmentation ; Open Economy Macroeconomics ; Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
• Subject: Capital controls ; Welfare ; Misallocation ; Financial frictions ; International trade

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Andreasen, Eugenia ; Bauducco, Sofía ; Dardati, Evangelina
• Event: Veröffentlichung
• (who): Inter-American Development Bank (IDB)
• (where): Washington, DC
• (when): 2021

Further information

• DOI: doi:10.18235/0003307
• Handle: http://hdl.handle.net/10419/237504
• Last update: 10.03.2025, 11:41 AM CET