Microeconomic effects of capital controls: The chilean experience during the 1990s

Abstract

This paper provides empirical evidence on some of the microeconomic effects of the capital controls introduced in Chile during the 1990s, in particular, the unremunerated reserve requirement (URR). By looking at financial statements for a group of 73 Chilean firms during 1986-2001, the paper attempts to identify the effects of the URR on the firms' costs and ways of financing. Results show that the effects of the URR are firm specific; for instance, there are striking differences in the response to the URR among firms of different size and those with or without access to international capital markets. Copyright © 2003 John Wiley & Sons, Ltd.

The Effectiveness of Capital Controls and Prudential Policies in Managing Large Inflows

“…Forbes (2007) argues inflow controls in Chile imposed a financial constraint on small firms. Gallego and Hernandez (2003) find that controls were associated with lower leverage and greater reliance on retained earnings.…”

One cost of the Chilean capital controls: Increased financial constraints for smaller traded firms

“…Edwards (2000) is one of the few studies to examine whether the capital controls reduced financial contagion. 16 Work in progress by Gallego and Hernández (2002) Modigliani and Miller (1958) show that under certain conditions, including frictionless capital markets, firms should face the same cost for internal and external finance. As a result, a firm's liquidity and capital structure should not affect its investment decisions.…”

Capital Controls: Mud in the Wheels of Market Discipline

“…Source: Forbes (2003). 7 Recent work by Gallego and Hernández (2002) also shows that the Chilean capital controls affected a range of firm-level variables, with differential effects on small and large companies. firms operating in countries with capital controls tend to overinvest in physical assets and underinvest (by as much as 40 percent) in financial assets.…”