Capital controls, corporate debt and real effects
Martha López (),
Jose-Luis Peydro () and
Paul E. Soto
Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra
Non-US firms have massively borrowed dollars (foreign currency, FX), which may lead to booms and crises. We show the real effects of capital controls, including prudential benefits, through a firm-debt mechanism. Our identification exploits the introduction of a tax on FX-debt inflows in Colombia before the global financial crisis (GFC), and administrative, proprietary datasets, including loan-level credit register data and firm-level information on FX-debt inflows and imports/exports. Our results show that capital controls substantially reduce FX-debt inflows, particularly for firms with larger ex-ante FX-debt exposure. Moreover, firms with weaker local banking relationships cannot substitute FX-debt with domestic-debt and experience a reduction in total debt and imports upon implementation of the policy. However, our results suggest that, by preemptively reducing pre-crisis firm-level debt, capital controls boost exports during the subsequent GFC, especially among financially-constrained firms.
Keywords: Capital controls; corporate FX-debt; real effects; macroprudential; capital inflows (search for similar items in EconPapers)
JEL-codes: F3 F38 F4 F6 G01 G15 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-fdg, nep-ifn, nep-mon and nep-opm
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