One Cost of the Chilean Capital Controls: Increased Financial Constraints for Smalles Traded Firms

By Kristin J. Forbes. 2003

294 citations recorded by the source corpus.

There is growing support for taxes on short-term capital inflows in emerging markets, such as the encaje adopted by Chile from 1991-98. Previous empirical assessments of the encaje conclude that it may have generated some small economic benefits, such as shifting the composition of capital inflows to a longer maturity, but no significant economic costs. Managers of small and medium-sized companies in Chile, however, claim that the encaje made it substantially more difficult to obtain financing for productive investment. This paper assesses whether the Chilean capital controls increased financial constraints for different-sized, publicly-traded firms. It uses two different testing methodologies: a Tobin's q and Euler-equation framework. Results indicate that during the encaje, smaller traded firms in Chile experienced significant financial constraints and these constraints decreased as firm size increased. Both before and after the encaje, however, no group of traded firms experienced significant financial constraints, and there is no relationship between firm size and financial constraints. Although Chilean-style capital controls may also yield benefits encaje could be particularly important in emerging markets where smaller firms can be valuable sources of job creation and economic growth.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/8e1abb29cc9763bbdf09a8fc6ad44e04239df31f

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

In Finance

Citations in the corpus

Capital Flow Management Measures: What Are They Good For? (2014, unknown): “3 For recent surveys of this literature that show limited effects of capital controls, see Forbes (2007a), Cline (2010), Magud, Reinhart, and Rogoff (2011), Klein (2012), and IMF (2013).”
Managing Capital Inflows: What Tools to Use? (2011, background): “20 Other papers with consonant findings are: Kaminsky and Reinhart (1999), Demirguc-Kunt and Detragiache (2002), Barajas et al.”
Credit Constraints, Heterogeneous Firms and International Trade (2013, unknown): “Prior evidence suggests that smaller firms are more credit constrained (e.g. Beck et al. 2005; Forbes 2007).”
Capital Control Measures: A New Dataset (2015, unknown): “5See, for example, Forbes (2007), Binici, Schindler, and Hutchison (2010), Klein (2012), Prati, Schindler, and Valenzuela (2012), Forbes and Klein (2015), and Klein and Shambaugh (2015).”
Are All the Sacred Cows Dead? Implications of the Financial Crisis for Macro- and Financial Policies (2010, unknown): “50 Forbes (2007).”
NO DEEP POCKETS: SOME STYLIZED EMPIRICAL RESULTS ON FIRMS' FINANCIAL CONSTRAINTS (2010, unknown): “In an opposing direction of liberalization, Forbes (2007) recently showed that Chilean capital controls increased financial constraints for small firms.”