Fettered cross-border capital flows, external finance dependence, and international trade

The effects of capital controls on international trade have not been thoroughly examined empirically. Using bilateral industry-level export data across a large number of countries, this paper evaluates how capital controls affect exports. We identify the effect of capital controls on export activities by exploiting the variation in capital controls across countries and variation in external finance dependence across industries. While we find that capital controls adversely affect total exports, analyses of the export margins indicate that the export distorting effect of capital controls works by deterring single and multiple export market entries by exporters, reducing export intensities of exporters, and the range of goods exporters can ship to each market destination. Further analysis in the paper reveals that the export distorting effects of capital controls is invariant of whether the restriction is on inward or outward capital controls, although the relative impact of inward capital control is higher. We also find that capital controls distort exports in OECD and non-OECD countries, although the effect is higher for non-OECD countries. We discuss the policy implications of the findings.