We use a general equilibrium model with 11,532 heterogeneous firms to illustrate the mechanism by which the URR affects firm-level dynamics and international trade. Our data is gathered from the Chilean Annual Manufacturing Census. In the model, heterogeneous entrepreneurs differ in their idiosyncratic productivity and operate in sectors with different capital-intensities. Entrepreneurs can save or borrow, but they face a collateral constraint. In this framework, which follows closely Leibovici (2016), we introduce an URR on capital inflows. Unlike the collateral constraint, the friction introduced by the URR affects all firms that rely on external borrowing by increasing the effective interest rate on loans. This deters capital accumulation and affects the firm’s decisions on production. The model shows that the introduction of the capital control reduces firms’ investment and sales on both domestic and foreign markets. Additionally, we find that these effects are heterogeneous depending on sectoral capital intensity as firms that rely on more capital intensive technologies have more stringent financing requirements.
Then, we use data from the Chilean Annual Manufacturing Census to empirically corroborate the insights and intuition obtained from the model. We find that sales, domestic sales, total exports and investment are negatively affected by the encaje particularly in sectors with high capital intensity.