Paper #1833

Title:

Capital controls, corporate debt and real effects

Authors:

Andrea Fabiani, Martha López Piñeros, José-Luis Peydró and Paul E. Soto

Date:

September 2021

Abstract:

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

JEL codes:

F3; F38; F4; F6; G01; G15; G21; G28

Area of Research:

Finance and Accounting

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