One cost of the Chilean Capital controls

This article is about the control of capital flow by Chile by imposing short term taxes on the inflows. The article discussed the imposition of the tax created significant financial constraints for the smaller firms specially and as such as the firms grew in size, the financial constraints were decreased. Further, before and after the imposition of such taxes, there was no such effect on the firm size.

The article discusses the historical context of the capital account liberalization policies being favored by most of the governments and as such emerging markets were given incentives to follow the policies which were directed at improving the capital flows. However, due to strong opposition meted out to the globalization and liberalization of the capital flows, many criticized such approach and as a result, Chile imposed the taxes on capital inflows.

The article further discussed as to how a planned liberalization policies were initiated in order to attract the capital flows into the country however, as a result of this, the inflationary pressures on the economies of Latin America were increasing to the level where they were creating serious problems for the economies. The article discussed the proposed aim of imposing the taxes as it was done in order to control the inflationary pressures on its currency i. e. peso.

During the period of 7 seven years during which this tax was imposed, the encaje was changed and as such the effort was also placed on regulating the short term inflow of capital into the country. The article has utilized the ideas of the Modigliani and Miller as the basis for evaluating the capital flows and such relied on the Euler equation to estimate the impact on the firm size. As discussed above that the basic purpose of this article was to assess the impact of such taxes on the financial constraints and how the firm size got affected by such change therefore methodology used was test the validity of the assumptions.

The data set used for the purpose of this study was based on the Worldscope database reported on the CDs. The article further reported that the data from non- financial firms was also taken into consideration. The data belonged to the period between 1998 and 2002 however, what is also important to understand that this dataset was taken from the data which was publically available therefore the data which may have been contributed further towards the study but not reported to may have provided much more flexibility and depth to the overall aims of the study.

The study used different econometric models such as OLS, fixed –effects as well as other methodologies however, the authors also successfully discussed the weaknesses of such methodologies also. The results indicated that the smaller firms experienced the financial constraints due to the imposition of this tax however, as the firm grows in size the impact subsidize too. Three Questions

What is however, also critical to note that the article has completely failed to distinguish or outline the different variables of the financial constraints which are being used as the case in point. Further, it is also important to note that the authors have utilized multiple econometric models which have their own inherent deficiencies and as such relying on them completely would not provide the desired results for study. Further the conclusions drawn by the authors may not entirely be considered as complete and plausible.

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