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Publications
Publications
  • September 2017
  • Article
  • Journal of International Economics

The Real Effects of Capital Controls: Firm-Level Evidence from a Policy Experiment

By: Laura Alfaro, Anusha Chari and Fabio Kanczuk
  • Format:Print
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Abstract

Emerging-market governments adopted capital control taxes to manage the massive surge in foreign capital inflows in the aftermath of the global financial crisis. Theory suggests that the imposition of capital controls can drive up the cost of capital and curb investment. This paper evaluates the effects of capital controls on firm-level stock returns and real investment using data from Brazil. On average, there is a statistically significant drop in cumulative abnormal returns consistent with an increase in the cost of capital for Brazilian firms following capital control announcements. The results suggest significant variation across firms and financial instruments. Large firms and the largest exporting firms appear less negatively affected compared to external-finance-dependent firms, and capital controls on equity inflows have a more negative announcement effect on equity returns than those on debt inflows. Real investment falls in the three years following the controls. Overall, the findings have implications for macro-finance models that abstract from heterogeneity at the firm level to examine the optimality of capital control taxation.

Keywords

Capital Controls; Discriminatory Taxation; International Investment Barriers; Exports; Debt; Cost of Capital; Taxation; Investment; Borrowing and Debt; Equity; Brazil

Citation

Alfaro, Laura, Anusha Chari, and Fabio Kanczuk. "The Real Effects of Capital Controls: Firm-Level Evidence from a Policy Experiment." Journal of International Economics 108 (September 2017): 191–210. (Also see NBER Working Paper 20726. See comment in Brookings Series: The Hutchins Roundup. See also, feature in NBER Digest March 2015 issue. )
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About The Author

Laura Alfaro

General Management
→More Publications

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  • Distributional Consequences of Monetary Policy Across Races: Evidence from the U.S. Credit Register By: Laura Alfaro, Ester Faia and Camelia Minoiu
  • Undisclosed Debt Sustainability By: Laura Alfaro and Fabio Kanczuk
  • El Salvador: Launching Bitcoin as Legal Tender By: Laura Alfaro, Carla Larangeira and Ruth Costas
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