Capital Controls and Firm Performance

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 reduce aggregate production and investment while increasing exports, the share of exporters and TFP. The e↵ects of capital controls are exacerbated for firms in more capital-intensive sectors and for exporters.