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

_IMF Working Papers, February 27, 2026_

## Source details

**Canonical URL:** [Tilting the Balance Towards Equity: Capital Controls and the Structure of External Liabilities](https://www.imf.org/en/publications/wp/issues/2026/02/27/tilting-the-balance-towards-equity-capital-controls-and-the-structure-of-external-574277)

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## Bibliographic details
- Authors: Tobias Krahnke, Wenjie Li
- Published: February 27, 2026
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229038515.001

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### Executive summary and research question
- 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.

### Data and methodology
- 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.

### Main findings
- 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.

### Policy implications and recommendations
- 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.

### Keywords and thematic focus
- Capital Controls, External Debt, External Liabilities, Foreign Direct Investment, Portfolio Equity

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- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2026/02/27/tilting-the-balance-towards-equity-capital-controls-and-the-structure-of-external-574277_