Paper explores effects of capital controls on cost of international debt

Financial firms that belong to the European Union and have English legal origins are less likely to be vulnerable to the effects of capital controls, according to a working paper published by the International Monetary Fund.

In what the authors claim is the first study to explore the effects of capital controls on the cost of international debt capital, Capital Controls and the Cost of Debt examines how capital controls affect the credit spreads of bonds issued in international markets by advanced and emerging-market borrowers.

Authors Eugenia Andreasen, Martin Schindler and Patricio Valenzuela show restrictions on capital inflows produce “substantial” and “economically meaningful” increases in corporate bond spreads.

For financially constrained firms, the effect of capital controls on inflows is particularly strong. However, certain factors make firms less vulnerable – namely operating in deeper financial markets, having access to market-based funding, belonging to the European Union and having English legal origins.