Tilting the Balance Towards Equity: Capital Controls and the Structure of External Liabilities

Tobias Krahnke and Wenjie Li

No 2026/037, IMF Working Papers from International Monetary Fund

Abstract: Capital flow restrictions have long been debated as a tool to manage external financial vulnerabilities, as volatile international capital flows and high external debt can contribute to financial crises. However, empirical evidence on whether capital flow management measures (CFMs) can shift the composition of countries’ external liabilities toward more stable types of funding is limited. Using a novel dataset of granular capital account openness indicators measuring policy intensity, we show that an asymmetric liberalization favoring equity over debt can tilt external capital structures toward equity. This effect is stronger in countries with higher institutional quality, underscoring the role of governance in attracting stable foreign investment.

Keywords: Capital Controls; Foreign Direct Investment; Portfolio Equity; External Debt; External Liabilities (search for similar items in EconPapers)
Pages: 64
Date: 2026-02-27
New Economics Papers: this item is included in nep-cfn, nep-fdg, nep-ifn, nep-mon and nep-opm
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