Capital Controls and Firm Performance: The Effects of the Chilean Encaje

This paper studies the effects of the capital controls imposed by Chile between 1991 and 1998, i.e. the Chilean encaje, on firms' production, investment and exporting decisions. We use a general equilibrium model with... [ view full abstract ]

This paper studies the effects of the capital controls imposed by Chile between 1991 and 1998, i.e. the Chilean encaje, on firms' production, investment and exporting decisions. We use a general equilibrium model with heterogeneous firms and financial constraints to illustrate the mechanism by which capital controls on inflows affect firm-level dynamics and international trade. We find that capital controls on inflows reduce investment and sales on both domestic and foreign markets. The results also show that capital controls on inflows deter firms' entry into foreign markets. Finally, we find that these effects are exacerbated for firms in more capital-intensive sectors. Using data from the Chilean Encuesta Nacional Industrial Anual (ENIA) we empirically corroborate the conclusions and insights of the theoretical model.