Beware the Side Effects: Capital Controls, Trade, Misallocation andWelfare

Eugenia Andreasen (), Sofia Bauducco, Evangelina Dardati () and Enrique Mendoza ()
Additional contact information
Eugenia Andreasen: University of Chile
Evangelina Dardati: Universidad Diego Portales
Enrique Mendoza: University of Pennsylvania and NBER

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We show that capital controls have large adverse effects on misallocation, exports and welfare using a dynamic Melitz-OLG model with heterogeneous firms, monopolistic competition, endogenous trade participation and collateral constraints. Static effects increase misallocation by reducing capital-labor ratios and rising firmprices, dynamic effects reduce it by incentivizing saving and delaying entry into export markets, and general equilibrium effects are ambiguous. Firms at the collateral constraint or at their optimal scale are barely affected but those in between are severely affected. Calibrated to the 1990s Chilean encaje, the model yields higher aggregate misallocation with larger effects on exporters and high-productivity firms. Social welfare falls and welfare of exporters falls significantly more. LTV regulation cuts credit by the same amount at sharply lower costs, because it spreads the burden of the cut more evenly. A panel data analysis of Chilean manufacturing firms yields strong evidence supporting the model’s predictions

Keywords: Capital controls; welfare; misallocation; financial frictions; international trade (search for similar items in EconPapers)
JEL-codes: F12 F38 F41 O47 (search for similar items in EconPapers)
Pages: 92 pages
Date: 2023-02-07
New Economics Papers: this item is included in nep-des, nep-dge, nep-int and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Beware the Side Effects: Capital Controls, Trade, Misallocation and Welfare (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:23-005

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