Capital Controls and the Cost of Debt
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Using a panel data set for international corporate bonds and capital account restrictions in advanced and emerging economies, we show that restrictions on capital inflows produce a substantial and economically meaningful increase in corporate bond spreads, with a one-standard-deviation increase in our capital controls index increasing spreads by up to 35 basis points. The effect of capital controls on inflows differs across firms and across countries; the effect is particularly strong for firms that face more restricted access to alternative sources of external financing. Our findings establish a novel channel through which capital controls affect economic outcomes.
Jel ClassificationF3 F4 G1 G3
We particularly thank the editor, Linda Tesar, and two anonymous referees for their extensive comments and suggestions. We have also benefited from helpful comments from Arpad Abraham, Franklin Allen, Elena Carletti, Oren Levintal, Peter Lindner, Jun “QJ” Qian, Tsuyoshi Sasaki and seminar participants at the Central Bank of Chile, the University of Santiago of Chile, the University of San Andrés, the 2018 International Risk Management Conference, the 2018 International Atlantic Economic Conference, the 2014 Latin America and the Caribbean Economic Association Annual Meeting, the IFABS 2016 Barcelona Conference, the MBF 2016 Rome Conference and the 43rd Annual Conference of the Eastern Economic Association. Eugenia Andreasen wishes to thank the Fondecyt Initiation Project #11160494 and Dicyt (Universidad de Santiago de Chile), for their financial support. Patricio Valenzuela wishes to thank the Institute for Research in Market Imperfections and Public Policy (ICM IS130002). We thank Chris Dunnett for excellent research assistance. The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF, its Executive Board, or IMF policy.
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