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Capital Controls and Firm Performance: The Effects of the Chilean Encaje

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  • Andreasen, Eugenia
  • Bauducco, Sofía
  • Dardati, Evangelina

Abstract

This paper studies the effects of the capital controls imposed by Chile between 1991 and 1998, i.e. the Chilean encaje, on firms' production, investment and exporting decisions. We use a general equilibrium model with heterogeneous firms and financial constraints to illustrate the mechanism by which capital controls on inflows affect firm-level dynamics and international trade. We find that capital controls on inflows depress the local economy due to the credit restriction, reducing aggregate production, investment and domestic sales. This reduced level of domestic activity increases the firm's incentives to export, increasing both the level of exports and the share of exporters. Most of these effects are exacerbated for firms in more capital-intensive sectors. Using data from the Chilean Encuesta Nacional Industrial Anual (ENIA) we empirically corroborate the conclusions and insights of the theoretical model.

Suggested Citation

  • Andreasen, Eugenia & Bauducco, Sofía & Dardati, Evangelina, 2017. "Capital Controls and Firm Performance: The Effects of the Chilean Encaje," Research Department working papers 1153, CAF Development Bank Of Latinamerica.
    • Handle: RePEc:dbl:dblwop:1153
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    1. María Alejandra Amado, 2022. "Macroprudential FX Regulations: Sacrificing Small Firms for Stability?," Working Papers 2236, Banco de España.

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    Keywords

    Comercio internacional; Economía; Finanzas públicas; Sector financiero;
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