One Cost of the Chilean Capital Controls: Increased Financial Constraints for Smaller Traded Firms

Kristin J. Forbes
2002 Social Science Research Network  
There is growing support for taxes on short-term capital inflows in emerging markets, such as the encaje adopted by Chile from 1991 to 1998. This paper assesses whether the Chilean capital controls increased financial constraints for different-sized, publicly-traded firms. It uses an Euler-equation framework and shows that during the encaje, smaller traded firms experienced significant financial constraints. These constraints decreased as firm size increased. Both before and after the encaje,
more » ... after the encaje, however, smaller firms did not experience significant financial constraints, and there is no relationship between firm size and financial constraints. Although Chilean-style capital controls may yield some benefits, any such benefits should be weighed against this cost of increasing financial constraints for small and mid-sized firms.
doi:10.2139/ssrn.365081 fatcat:7azu6zly25csrioyh77tiim52u