We establish that macroprudential controls limiting capital flows can curb risks arising from foreign currency borrowing by corporates in emerging markets. Firm-level data show that Indian firms tend to issue more foreign currency debt when the interest rate differential between India and the U.S. is higher. This “carry trade” relationship, however, breaks down once regulators institute more stringent interest rate caps on borrowing; in response, riskier borrowers cut issuance most. Prior to adoption of this macroprudential measure, stock price exposure of issuers to currency risk rises after issuance, as witnessed during the “taper tantrum” episode of 2013; this source of vulnerability is nullified by the measure, as confirmed during the October 2018 oil price shock and the COVID-19 outbreak. We find no evidence of the policy’s efficacy being undermined by leakage or regulatory arbitrage.

We examine the optimal financing of infrastructure when governments can expropriate rents from private sector firms that manage infrastructure. While private firms need incentives to implement projects well, governments need incentives to limit expropriation. This double moral hazard limits the willingness of outside investors to fund infrastructure projects. Optimal financing contracts involve government guarantees to investors against project failure to incentivize the government to agree not to expropriate, thus improving private sector incentives and project quality. The contract also reflects several other features prevalent in infrastructure financing in practice, among which are government coinvestment, tax subsidies, and development rights.

We document capital misallocation in the U.S. investment-grade (IG) corporate bond market, driven by quantitative easing (QE). Prospective fallen angels — risky firms just above the IG cutoff — enjoyed subsidized bond financing in 2009–19. This effect is driven by Fed purchases of securities inducing long-duration IG-focused investors to rebalance their portfolios towards higher-yielding IG bonds. The benefiting firms (i) exploited the sluggish downward adjustment of credit ratings after M&A to finance risky acquisitions with bond issuances, and (ii) increased market share affecting competitors’ employment and investment, but (iii) suffered severe downgrades at the onset of the pandemic.