Beware the Side Effects: Capital Controls, Trade, Misallocation and Welfare

Eugenia Andreasen, Sofia Bauducco, Evangelina Dardati and Enrique Mendoza

No 30963, NBER Working Papers from National Bureau of Economic Research, Inc

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 firm prices, 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.

JEL-codes: F12 F38 F41 O47 (search for similar items in EconPapers)
Date: 2023-02
New Economics Papers: this item is included in nep-dge and nep-int
Note: IFM
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Citations: View citations in EconPapers (1)

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Working Paper: Beware the Side Effects: Capital Controls, Trade, Misallocation andWelfare (2023)
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