Capital Controls, Corporate Debt and Real Effects

• Authors: José-Luis Peydró.
• BSE Working Paper: 110811 | April 22
• Keywords: capital controls , capital inflows , corporate FX-debt , real effects , macroprudential
• JEL codes: F3, F38, F4, F6, G01, G15, G21, G28
• capital controls
• capital inflows
• corporate FX-debt
• real effects
• macroprudential

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.