Link to paper ⬇️
emiliozaratiegui.github.io/Personal-Web...

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Compute optimal capital control (Y-axis) as function of productivity elasticity wrt investment (x-axis)

Trade-off is relevant -> Adding investment and misallocation turns tax (dashed black) into subsidy (solid blue)

Result driven mostly by effects on productivity

I leverage Orbis data to obtain estimates for 18 countries

Using firm-level balance sheet data, estimate misallocation (dispersion in marginal returns to capital)

Use as input to obtain elasticity of TFP with respect to investment

I derive a sufficient static formula ➡️ Clear mapping to data

Key object: Productivity losses from capital controls

I obtain a closed form expression that depends on cross-sectional misallocation across firms

How can this be measured?

Governments can't always control allocation of credit ➡️ Trade-off!

Capital controls prevent and mitigate crises but affect productivity

Is this quantitatively relevant?

What is the optimal level of capital controls, defined as a tax on foreign borrowing?

As benchmark, first allow policymaker to control allocation of credit between consumption and investment.

Capital control on borrowing and investment subsidy ➡️ No trade-off

Financial crises: Income depends on prices, which depends on aggregate choices ➡️ Not internalized by HHs

Capital controls can reduce foreign borrowing ➡️ Prevents and mitigates crises

This is the standard motivation in the literature and underpins the IMF view

Key elements

1) Financial crises: Households (HH) face a borrowing constraint that depends on income ➡️ when it binds, reduced borrowing reduces income leading to vicious cycle
2) Misallocation: Firms differ in their ability to access capital ➡️ reduced productivity

I build a model that combines two literatures: Small open economy literature on optimal capital controls, and extensive literature on capital misallocation.

Some context:

Capital controls have become a key policy tool and are now part of the IMF toolkit

Traditional view: Capital controls can contribute to financial stability

Overlooked: Effects on productivity through misallocation that have been empirically documented