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 highly disaggregated bilateral industry-level export data across a large number of countries, this paper evaluates how restrictions on cross-border capital flows affect export. We identify the effect of capital control on export by exploiting the variation in capital control across countries and variation in external finance dependence across industries. While we find that capital control adversely effects 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. Our result has important policy implications for countries that seek to pursue export-led growth but suffer from capital accounts restrictions