Compositional Effects of Capital Controls – Theory and Evidence

Mary Kathryn Campion and Rebecca Neumann

The World Economy, 2003, vol. 26, issue 7, 957-973

Abstract: This paper examines the effects of capital controls on the composition of inter‐national capital flows, paying particular attention to debt inflows versus equity inflows. A two‐period small open economy model with stochastic second‐period output and asymmetric information between domestic agents and international financiers is utilised to generate predictions regarding the effects of capital controls on the relative use of debt versus equity for financing first‐period investment. These capital control implications are then investigated with quarterly frequency panel data for Latin America. Capital controls are found to significantly affect the composition of the capital account.

Date: 2003
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