Description

This paper studies the effects of capital controls on firms' production, investment and exporting decisions. We empirically characterize the firm's responses to the introduction of a capital control, using the Chilean encaje implemented between 1991 and 1998 as a laboratory. Motivated by our findings, we build a general equilibrium model with heterogeneous firms, financial constraints and international trade and calibrate it to the Chilean economy. We find that capital controls re- duce aggregate production and investment while increasing exports, the share of exporters and TFP. The effects of capital controls are exacerbated for firms in more capital-intensive sectors and for exporters.