The Microeconomic Evidence on Capital Controls

Abstract

This chapter describes the microeconomic consequences of capital controls. It is noted that capital controls can decrease the supply and increase the price of capital, making it more difficult for many firms to obtain financing for productive investment. Capital controls also appear to have widespread effects on market discipline and the allocation of capital across firms, effects that are likely to reduce productivity and growth. They can cause widespread distortions in the behavior of firms and individuals. Thus, the studies surveyed in this chapter present compelling empirical evidence that capital controls can influence the supply and cost of capital, market discipline, the allocation of resources, and the behavior of firms and individuals. Several studies also find that the effects of capital account liberalization vary across types of firms, reflecting different preexisting distortions under capital controls.

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