Tilting the Balance Towards Equity: Capital Controls and the Structure of External Liabilities

IMF Working Papers, February 27, 2026

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Capital flow restrictions are debated as a tool to manage external financial vulnerabilities caused by volatile international capital flows and high external debt.
The paper investigates whether capital flow management measures (CFMs) can shift the composition of countries’ external liabilities toward more stable types of funding, specifically by favoring equity over debt.
Key claim: An asymmetric liberalization favoring equity over debt can tilt external capital structures toward equity.

Uses a novel dataset of granular capital account openness indicators measuring policy intensity.
Empirical approach assesses how differential (asymmetric) liberalization across asset types affects the composition of external liabilities.

An asymmetric liberalization favoring equity over debt can tilt external capital structures toward equity.
The effect of asymmetric liberalization on shifting liabilities toward equity is stronger in countries with higher institutional quality, highlighting the role of governance in attracting stable foreign investment.

Policymakers can influence the structure of external liabilities through targeted capital account policies that differentially liberalize equity relative to debt.
Strengthening institutional quality amplifies the effectiveness of CFMs aimed at attracting more stable foreign equity investment.

Capital Controls, External Debt, External Liabilities, Foreign Direct Investment, Portfolio Equity