Capital controls, corporate debt and real effects

Fabiani, Andrea; López Piñeros, Martha; Peydró, José-Luis; Soto, Paul E.

Capital controls, corporate debt and real effects

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Fabiani, A, López Piñeros, M, Peydró, J, Soto, P. Capital controls, corporate debt and real effects. 2021. handle: http://hdl.handle.net/10230/68668

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Abstract

Non-US firms have massively borrowed dollars (foreign currency, FX), which may lead to booms and crises. We show the real effects of capital controls, including prudential benefits, through a firm-debt mechanism. Our identification exploits the introduction of a tax on FX-debt inflows in Colombia before the global financial crisis (GFC), and administrative, proprietary datasets, including loan-level credit register data and firm-level information on FX-debt inflows and imports/exports. Our results show that capital controls substantially reduce FX-debt inflows, particularly for firms with larger ex-ante FX-debt exposure. Moreover, firms with weaker local banking relationships cannot substitute FX-debt with domestic-debt and experience a reduction in total debt and imports upon implementation of the policy. However, our results suggest that, by preemptively reducing pre-crisis firm-level debt, capital controls boost exports during the subsequent GFC, especially among financially-constrained firms.