One Cost of the Chilean Capital Controls: Increased Financial Constraints for Smaller Trade Firms, Issue 9777
There is growing support for taxes on short-term capital inflows in emerging markets, such as the encaje adopted by Chile from 1991-98. Previous empirical assessments of the encaje conclude that it may have generated some small economic benefits, such as shifting the composition of capital inflows to a longer maturity, but no significant economic costs. Managers of small and medium-sized companies in Chile, however, claim that the encaje made it substantially more difficult to obtain financing for productive investment. This paper assesses whether the Chilean capital controls increased financial constraints for different-sized, publicly traded firms. It uses two different testing methodologies: a Tobin's-q and Euler-equation framework. Results indicate that during the encaje, smaller traded firms in Chile experienced significant financial constraints and these constraints decreased as firm size increased. Both before and after the encaje, however, no group of traded firms experienced significant financial constraints, and there is no relationship between firm size and financial constraints. Although Chilean-style capital controls may also have significant benefits, this cost of the encaje could be particularly important in emerging markets where smaller firms are valuable sources of job creation and economic growth. Keywords: Capital Controls, Encaje, Chile, Firm-financing Constraints. JEL Classifications: F3, F21, G1, G32, O16, O54.
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assets borrowing capital inflows cash flow central bank Chilean capital controls Chilean firms Chilean peso coefficient estimates coefficient on Cash Column constrained than larger constraints for smaller dataset debt dummy variables Economic emerging markets empirical encaje affected encaje period equations 9 Euler-equation model evidence explanatory variables F-statistic firm-financing constraints firm's cash stock firms in Chile Gilchrist and Himmelberg Glenn Hubbard global Himmelberg 1999 impact implicit cost increased financial constraints inflation-adjusted instruments interaction term internal finances Laeven large firms larger firms lending rates leverage Luigi Zingales macroeconomic marginal q measure of firm NBER Working Paper null hypothesis pesos post-encaje period publicly-traded firms q and Euler-equation q-based equation q-based methodology quintiles regressions robust estimates sample Sargan Section sensitivity analysis sensitivity tests serial correlation series of sensitivity short-term significant smaller firms subscription suggest Table testing framework Tobin's q Wald tests Worldscope