The Real Effects of Capital Controls: Credit
Description: The Real Effects of Capital Controls: Credit Constraints and Firm Investment Laura Alfaro, Anusha Chari and Fabio Kanczuk Discussion Elias Papaioannou London Business School, NBER and CEPR Structure Summary Research Question Approach
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slide1. The Real Effects of Capital Controls: Credit Constraints and Firm Investment Laura Alfaro, Anusha Chari and Fabio Kanczuk Discussion Elias Papaioannou London Business School, NBER and CEPR<br>
slide2. Structure Summary
Research Question
Approach
Findings
The Big Picture
Theory
Empirics
Guide to practice
Main Issues
Other Comments
Heterogeneity
Geeky 2 Introduction<br>
slide3. Research Motivation and Question Policy
Limitations of interest-rate as a single tool for monetary policy [other tools]
“popularity” of capital controls. (e.g., Malaysia, Brazil, Cyprus)
IMF “endorsement” (capital flow management, externalities)
Transmission of (monetary policy) shocks from industrial to developing-emerging economies (“currency war” idea) 3 Paper Summary<br>
slide4. Research Motivation and Question, cont. Policy
Limitations of interest-rate as a single tool for monetary policy [other tools]
“popularity” of capital controls. (e.g., Malaysia, Brazil, Cyprus)
IMF “endorsement” (capital flow management, externalities)
Transmission of (monetary policy) shocks from industrial to developing-emerging economies (“currency war” idea)
Academic interest
Theory
Externalities (Korinek, 2011, 2012, 2013)
Dilemma-Trilemma (Rey, 2013; Farhi and Werning, 2012, 2013)
Empirics.
Cross-country works (e.g., Klein, 2012, Forbes and Klein, 2014; Forbes et al. 20120)
Case studies (e.g., Forbes, 2007, Alfaro, Chari, and Kanczuk, 2014) 4 Paper Summary<br>
slide5. Approach. Event/Case Study Brazil. Large country, various capital control measures, topical
Firm-level data (large publicly traded firms on BOVESPA).
Stock returns around announcement (“finance” approach)
Investment in the three years before and after the imposition of capital controls 5 Paper Summary<br>
slide6. Results Negative stock returns (around announcement; +/1 day, alternative short-term windows)
Mostly for restrictions on equity investment
Mostly in finance-dependent sectors
Mostly in medium-sized and small firms
No effect on large exporting firms
Investment (+/- 2 years)
Overall little impact on investment (small drop)
Significant decline for small and medium sized firms (finance-dependent)
Increase in investment for exporting firms (in spite of currency appreciation) 6 Paper Summary<br>
slide7. Overall Nice work (though preliminary)
Firm-level analysis (though only publicly-traded firms)
Effort linking firms to theoretical channels (exportability, finance-dependence)
Numerous extensions (authors already try tackling some of these issues)
Sample (include small non-publicly-traded firms)
Time period
Examine heterogeneity across various other dimensions 7 Paper Summary<br>
slide8. Structure The Big Picture. From Theory to Empirics and Policy Guidance
Theory
Empirics
Guide to practice
Main Issues. Suggestions
Macro
Micro
Other Comments
Heterogeneity
Geeky points 8<br>
slide9. From Theory to Empirics and Policy Guidance Theory (pros and cons)
Short-run analysis
Medium/long-run analysis
Dynamics
Empirical work policy prescriptions
Cross-country (lessons?).
Case-studies (lessons?) 9 The Big Picture<br>
slide10. Theory. Pros. [Korinek, 2012; Farhi and Werning, 2013, 2014] Externalities (“hot” money)
Static (capital misallocation, excessive risk taking)
Dynamic (subsequent crisis); capital flow bonazas financial crises
Capital Flow Management.
Capital controls allow monetary authorities leaning against the wind (under a flexible exchange rate regime) [Brazil]
Gain some monetary policy autonomy (under fixed exchange rate) [Cyprus] 10 The Big Picture<br>
slide11. Theory. Cons. Benefits of financial integration
Foreign capital finance local (high return) projects
Lower cost of capital capital accumulation neo-classical growth
Enable technology adoption, innovation (TFP)?
Risk diversification 11 The Big Picture<br>
slide12. Policy. Weighting Pros and Cons Gains from capital account openness, financial liberalization: moderate positive (ambiguity on strength). Medium/long run. (Gourinchas and Jeanne, 2012; Alfaro, Kalemli-Ozcan, and Volosovyc 2014, Courdacier, Rey, and Winant, 2013, Chari and Henry, 2004, Henry, 2007).
This paper: perhaps even short-run
Costs from financial crises: large (e.g., Reinhart and Rogoff, 2008)
Clear-cut correlation (though not necessarily causation) between “hot” money and crises [rationale for capital flow management]
Costs from sudden stops. Recessions, sizable output contractions
Other costs. Externalities, risk taking
Smooth (business and leverage) cycle 12 The Big Picture<br>
slide13. Cases. Not catastrophic. Perhaps positive Malaysia
Chile
Brazil
Cyprus
Argentina, Iceland 13 The Big Picture<br>
slide14. The Key Issue. Counterfactual-causation Semi-exogenous (to country’s fundamentals) shock
Hot money is directed (ideally randomly) to many emerging countries
Countries respond (randomly) to the capital inflows
Capital controls (extensive – intensive margin)
Other interventions (regulation, interest rate increase, reserve requirements)
Study dynamic response of output, investment, stock and bond market returns, the exchange rate, etc. [levels and volatilities]
Short-run loss [akin to interest rate increase in standard neo-keynsian models]
Long-run gain [crisis preventions, smooth cycle]
Analogy to financial liberalization-development literature [Vegh, Tornell] 14 The Big Picture<br>
slide15. Analogies Short-term interest rate (monetary policy)
Various monetary policy interventions
Short-run, medium-run
VAR (dynamic) analysis 15 The Big Picture<br>
slide16. Other Empirical (Logical) Challenges Anticipation effects
Enforceability [bypass legislation]
Various forms of capital controls [Korinek and Sandri, 2014]
Taxing foreign capital (debt, equity, FDI)
Reserve requirements
Spillovers [control-treatment analogy blurred; Forbes et al. 2012]
Across countries
Across firms 16 The Big Picture<br>
slide17. Other Issues. Heterogeneity Across country
Return on investment (institutions, income)
Fiscal policy stance (government, state capacity)
Within country
Export-oriented firms/sectors
Finance-dependent (capital intensive) sectors
Across time
Business cycle conditions
Global economic situation 17 The Big Picture<br>
slide18. So What Can the Data Say? Cross-country studies:
correlations, some heterogeneity, accounting for observables (propensity score matching, synthetic control methods)
Identify disasters, huge successes [search for non-linearities]
Case-studies
Dig on mechanisms [important for both theory and policy]
Quantify costs and benefits [important for policy, even if static] 18 The Big Picture<br>
slide19. Back to Brazil. The Macro Approach Control-Treatment Approach
Counterfactual to Brazilian listed firms?
Chile, Argentina, Uruguay, Turkey
Counterfactual to the evolution of stock returns, investment, with capital controls
Exchange rate appreciation (pre-crisis trend)
Stable exchange rate (but high volatility)
Other policy responses
Spillovers?
“Control” group gets affected by policies in the treatment (e.g., Chile)
Dynamics
Short-run (weekly, monthly); medium-run (years, biannually), long-run?
Transitional dynamics, steady state? 19 The Big Picture<br>
slide20. Back to Brazil. The Micro Approach (Alfaro, Chari and Kanczuk, 2014) Control-Treatment Approach [within country]
Firms more-likely to get affected in the short-run (external finance dependent, non-exporting, small) compared to firms less likely to get affected
Interesting; important for policy; shed light on theoretical channels
Focus on a couple of channels 20 The Big Picture<br>
slide21. Results. Alfaro, Chari and Kanczuk, 2014 Short-term cost on equity capital (surprising?)
Medium-run
Counterfactual
Investment (more important)
Robustness
Counterfactual 21 The Big Picture<br>
slide22. Critique. Empirical Analysis and Evidence Focus on the (very) short-run (finance approach)
Do we care that much?
Hard-to-deal-with empirical issues (e.g., estimate betas: time-window, correlations in good and bad times change, etc)
Huge stock-market volatility (R2 very low)
Impossible defining a proper counterfactual
Many things happening at the same time
Investment.
Medium-long run
Simple differences (before-after).
Very hard isolating the impact of capital controls 22 The Key Issues<br>
slide23. Suggestions Main.
Add a macro-ish approach
Extend micro-level analysis
Heterogeneity
Channels
Other
For referees… 23 The Key Issues<br>
slide24. Constructive Approach Build upon and extend the current analysis
Macro approach: define some proper counterfactual markets and conduct a difference-in-difference analysis
Latin America, all emerging markets
Monthly data (more precise betas); short and medium run (Tornell and Vegh)
Dynamic panel (e.g., Henry, 2001; Chari and Henry, 2004)
Propensity score – non-linear function of obsevrables (Forbes and Klein, 2014)
Synthetic control method (A. Abadie)? 24 The Key Issues<br>
slide25. Constructive Approach Build upon and extend the current analysis
Micro approach: use richer micro data;
Privately held and publicly-traded firms.
Explore heterogeneity in greater detail
Perhaps use micro-level data both from Brazil and some other country(ies), such as Chile and Colombia 25 The Key Issues<br>
slide26. Other Comments. Heterogeneity Distinguish (decompose) industry external finance dependence (see Ciccone and Papaioannou, 2006, 2010, Fisman and Love, JEEA 2007)
Capital intensity
Growth opportunities
Also liquidity dependence (see Aghion, Farhi, and Kharoubbi, 2014) and tangibility (Braun and Larrain 2005)
Industry exportability (Rajan and Subramanian, JDE 2013)
Conduct the analysis sector-by-sector
Link estimates (elasticities) with various industry features
Sort firms by size and conduct the analysis for each decile-quantile
further understand heterogeneity 26 Other Comments<br>
slide27. Other Comments. Structure Theory
Not very clear (e.g., Brazil base-rate)
Give specific citations ( spell the exact mechanisms at play)
Structure
Repetitions
Detail contribution and novelty of empirical findings.
Missing ingredients-information
Graph with evolution of the exchange rate (also in other countries)
Stock-market index in dollar (or euro) terms.
Clarify differences between imposition and relaxation of capital 27 Other Comments<br>
slide28. Geeky Comments Inference (Multi-way clustering)
Serial correlation (firm-level)
Common shocks, such as imposition of capital controls (time-dimension)
Imposition and relaxation of capital controls. Differential effects
Sample. Include all firms
Market betas
No adjustment
Jointly estimate global market betas and EM betas
Monthly frequencies-returns
Use logarithm of Debt/Assets
Add trends 28 Other Comments<br>
slide29. Summary Nice paper
Extend the analysis
Macro
Micro
Industry heterogeneity
Fit the paper in the big picture literature
Emerging
Unclear
Theoretical unification empirics 29<br>
slide2. Structure Summary
Research Question
Approach
Findings
The Big Picture
Theory
Empirics
Guide to practice
Main Issues
Other Comments
Heterogeneity
Geeky 2 Introduction<br>
slide3. Research Motivation and Question Policy
Limitations of interest-rate as a single tool for monetary policy [other tools]
“popularity” of capital controls. (e.g., Malaysia, Brazil, Cyprus)
IMF “endorsement” (capital flow management, externalities)
Transmission of (monetary policy) shocks from industrial to developing-emerging economies (“currency war” idea) 3 Paper Summary<br>
slide4. Research Motivation and Question, cont. Policy
Limitations of interest-rate as a single tool for monetary policy [other tools]
“popularity” of capital controls. (e.g., Malaysia, Brazil, Cyprus)
IMF “endorsement” (capital flow management, externalities)
Transmission of (monetary policy) shocks from industrial to developing-emerging economies (“currency war” idea)
Academic interest
Theory
Externalities (Korinek, 2011, 2012, 2013)
Dilemma-Trilemma (Rey, 2013; Farhi and Werning, 2012, 2013)
Empirics.
Cross-country works (e.g., Klein, 2012, Forbes and Klein, 2014; Forbes et al. 20120)
Case studies (e.g., Forbes, 2007, Alfaro, Chari, and Kanczuk, 2014) 4 Paper Summary<br>
slide5. Approach. Event/Case Study Brazil. Large country, various capital control measures, topical
Firm-level data (large publicly traded firms on BOVESPA).
Stock returns around announcement (“finance” approach)
Investment in the three years before and after the imposition of capital controls 5 Paper Summary<br>
slide6. Results Negative stock returns (around announcement; +/1 day, alternative short-term windows)
Mostly for restrictions on equity investment
Mostly in finance-dependent sectors
Mostly in medium-sized and small firms
No effect on large exporting firms
Investment (+/- 2 years)
Overall little impact on investment (small drop)
Significant decline for small and medium sized firms (finance-dependent)
Increase in investment for exporting firms (in spite of currency appreciation) 6 Paper Summary<br>
slide7. Overall Nice work (though preliminary)
Firm-level analysis (though only publicly-traded firms)
Effort linking firms to theoretical channels (exportability, finance-dependence)
Numerous extensions (authors already try tackling some of these issues)
Sample (include small non-publicly-traded firms)
Time period
Examine heterogeneity across various other dimensions 7 Paper Summary<br>
slide8. Structure The Big Picture. From Theory to Empirics and Policy Guidance
Theory
Empirics
Guide to practice
Main Issues. Suggestions
Macro
Micro
Other Comments
Heterogeneity
Geeky points 8<br>
slide9. From Theory to Empirics and Policy Guidance Theory (pros and cons)
Short-run analysis
Medium/long-run analysis
Dynamics
Empirical work policy prescriptions
Cross-country (lessons?).
Case-studies (lessons?) 9 The Big Picture<br>
slide10. Theory. Pros. [Korinek, 2012; Farhi and Werning, 2013, 2014] Externalities (“hot” money)
Static (capital misallocation, excessive risk taking)
Dynamic (subsequent crisis); capital flow bonazas financial crises
Capital Flow Management.
Capital controls allow monetary authorities leaning against the wind (under a flexible exchange rate regime) [Brazil]
Gain some monetary policy autonomy (under fixed exchange rate) [Cyprus] 10 The Big Picture<br>
slide11. Theory. Cons. Benefits of financial integration
Foreign capital finance local (high return) projects
Lower cost of capital capital accumulation neo-classical growth
Enable technology adoption, innovation (TFP)?
Risk diversification 11 The Big Picture<br>
slide12. Policy. Weighting Pros and Cons Gains from capital account openness, financial liberalization: moderate positive (ambiguity on strength). Medium/long run. (Gourinchas and Jeanne, 2012; Alfaro, Kalemli-Ozcan, and Volosovyc 2014, Courdacier, Rey, and Winant, 2013, Chari and Henry, 2004, Henry, 2007).
This paper: perhaps even short-run
Costs from financial crises: large (e.g., Reinhart and Rogoff, 2008)
Clear-cut correlation (though not necessarily causation) between “hot” money and crises [rationale for capital flow management]
Costs from sudden stops. Recessions, sizable output contractions
Other costs. Externalities, risk taking
Smooth (business and leverage) cycle 12 The Big Picture<br>
slide13. Cases. Not catastrophic. Perhaps positive Malaysia
Chile
Brazil
Cyprus
Argentina, Iceland 13 The Big Picture<br>
slide14. The Key Issue. Counterfactual-causation Semi-exogenous (to country’s fundamentals) shock
Hot money is directed (ideally randomly) to many emerging countries
Countries respond (randomly) to the capital inflows
Capital controls (extensive – intensive margin)
Other interventions (regulation, interest rate increase, reserve requirements)
Study dynamic response of output, investment, stock and bond market returns, the exchange rate, etc. [levels and volatilities]
Short-run loss [akin to interest rate increase in standard neo-keynsian models]
Long-run gain [crisis preventions, smooth cycle]
Analogy to financial liberalization-development literature [Vegh, Tornell] 14 The Big Picture<br>
slide15. Analogies Short-term interest rate (monetary policy)
Various monetary policy interventions
Short-run, medium-run
VAR (dynamic) analysis 15 The Big Picture<br>
slide16. Other Empirical (Logical) Challenges Anticipation effects
Enforceability [bypass legislation]
Various forms of capital controls [Korinek and Sandri, 2014]
Taxing foreign capital (debt, equity, FDI)
Reserve requirements
Spillovers [control-treatment analogy blurred; Forbes et al. 2012]
Across countries
Across firms 16 The Big Picture<br>
slide17. Other Issues. Heterogeneity Across country
Return on investment (institutions, income)
Fiscal policy stance (government, state capacity)
Within country
Export-oriented firms/sectors
Finance-dependent (capital intensive) sectors
Across time
Business cycle conditions
Global economic situation 17 The Big Picture<br>
slide18. So What Can the Data Say? Cross-country studies:
correlations, some heterogeneity, accounting for observables (propensity score matching, synthetic control methods)
Identify disasters, huge successes [search for non-linearities]
Case-studies
Dig on mechanisms [important for both theory and policy]
Quantify costs and benefits [important for policy, even if static] 18 The Big Picture<br>
slide19. Back to Brazil. The Macro Approach Control-Treatment Approach
Counterfactual to Brazilian listed firms?
Chile, Argentina, Uruguay, Turkey
Counterfactual to the evolution of stock returns, investment, with capital controls
Exchange rate appreciation (pre-crisis trend)
Stable exchange rate (but high volatility)
Other policy responses
Spillovers?
“Control” group gets affected by policies in the treatment (e.g., Chile)
Dynamics
Short-run (weekly, monthly); medium-run (years, biannually), long-run?
Transitional dynamics, steady state? 19 The Big Picture<br>
slide20. Back to Brazil. The Micro Approach (Alfaro, Chari and Kanczuk, 2014) Control-Treatment Approach [within country]
Firms more-likely to get affected in the short-run (external finance dependent, non-exporting, small) compared to firms less likely to get affected
Interesting; important for policy; shed light on theoretical channels
Focus on a couple of channels 20 The Big Picture<br>
slide21. Results. Alfaro, Chari and Kanczuk, 2014 Short-term cost on equity capital (surprising?)
Medium-run
Counterfactual
Investment (more important)
Robustness
Counterfactual 21 The Big Picture<br>
slide22. Critique. Empirical Analysis and Evidence Focus on the (very) short-run (finance approach)
Do we care that much?
Hard-to-deal-with empirical issues (e.g., estimate betas: time-window, correlations in good and bad times change, etc)
Huge stock-market volatility (R2 very low)
Impossible defining a proper counterfactual
Many things happening at the same time
Investment.
Medium-long run
Simple differences (before-after).
Very hard isolating the impact of capital controls 22 The Key Issues<br>
slide23. Suggestions Main.
Add a macro-ish approach
Extend micro-level analysis
Heterogeneity
Channels
Other
For referees… 23 The Key Issues<br>
slide24. Constructive Approach Build upon and extend the current analysis
Macro approach: define some proper counterfactual markets and conduct a difference-in-difference analysis
Latin America, all emerging markets
Monthly data (more precise betas); short and medium run (Tornell and Vegh)
Dynamic panel (e.g., Henry, 2001; Chari and Henry, 2004)
Propensity score – non-linear function of obsevrables (Forbes and Klein, 2014)
Synthetic control method (A. Abadie)? 24 The Key Issues<br>
slide25. Constructive Approach Build upon and extend the current analysis
Micro approach: use richer micro data;
Privately held and publicly-traded firms.
Explore heterogeneity in greater detail
Perhaps use micro-level data both from Brazil and some other country(ies), such as Chile and Colombia 25 The Key Issues<br>
slide26. Other Comments. Heterogeneity Distinguish (decompose) industry external finance dependence (see Ciccone and Papaioannou, 2006, 2010, Fisman and Love, JEEA 2007)
Capital intensity
Growth opportunities
Also liquidity dependence (see Aghion, Farhi, and Kharoubbi, 2014) and tangibility (Braun and Larrain 2005)
Industry exportability (Rajan and Subramanian, JDE 2013)
Conduct the analysis sector-by-sector
Link estimates (elasticities) with various industry features
Sort firms by size and conduct the analysis for each decile-quantile
further understand heterogeneity 26 Other Comments<br>
slide27. Other Comments. Structure Theory
Not very clear (e.g., Brazil base-rate)
Give specific citations ( spell the exact mechanisms at play)
Structure
Repetitions
Detail contribution and novelty of empirical findings.
Missing ingredients-information
Graph with evolution of the exchange rate (also in other countries)
Stock-market index in dollar (or euro) terms.
Clarify differences between imposition and relaxation of capital 27 Other Comments<br>
slide28. Geeky Comments Inference (Multi-way clustering)
Serial correlation (firm-level)
Common shocks, such as imposition of capital controls (time-dimension)
Imposition and relaxation of capital controls. Differential effects
Sample. Include all firms
Market betas
No adjustment
Jointly estimate global market betas and EM betas
Monthly frequencies-returns
Use logarithm of Debt/Assets
Add trends 28 Other Comments<br>
slide29. Summary Nice paper
Extend the analysis
Macro
Micro
Industry heterogeneity
Fit the paper in the big picture literature
Emerging
Unclear
Theoretical unification empirics 29<br>