Working Paper: NBER ID: w11372
Authors: Kristin J. Forbes
Abstract: Macroeconomic analyses of capital controls face a number of imposing challenges and have yielded mixed results to date. This paper takes a different approach and surveys an emerging literature that evaluates various microeconomic effects of capital controls and capital account liberalization. Several key themes emerge. First, capital controls tend to reduce the supply of capital, raise the cost of financing, and increase financial constraints - especially for smaller firms, firms without access to international capital markets and firms without access to preferential lending. Second, capital controls can reduce market discipline in financial markets and the government, leading to a more inefficient allocation of capital and resources. Third, capital controls significantly distort decision-making by firms and individuals, as they attempt to minimize the costs of the controls or even evade them outright. Fourth, the effects of capital controls can vary across different types of firms and countries, reflecting different pre-existing economic distortions. Finally, capital controls can be difficult and costly to enforce, even in countries with sound institutions and low levels of corruption. This microeconomic evidence on capital controls suggests that they have pervasive effects and often generate unexpected costs. Capital controls are no free lunch.
Keywords: No keywords provided
JEL Codes: F2; F3; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Capital Controls (F38) | Reduced Supply of Capital (O16) |
| Capital Controls (F38) | Increased Cost of Financing (G32) |
| Capital Controls (F38) | Increased Financial Constraints (G19) |
| Capital Controls (F38) | Reduced Market Discipline (G18) |
| Reduced Market Discipline (G18) | Inefficient Capital Allocation (D61) |
| Capital Controls (F38) | Distorted Decision-Making (D91) |
| Capital Controls (F38) | Enforcement Challenges (K42) |