This paper considers the effect of exchange and capital controls on trade in
the gravity-equation framework, in which bilateral exports depend on the
distance between countries, the countries" size and wealth, tariff barriers, and
exchange and capital controls. The extent of exchange and capital controls is
measured by unique indices. In view of the degree to which countries have
liberalized their exchange systems, controls on current payments and
transfers are found to be a minor impediment to trade, while capital controls
significantly reduce exports into developing and transition economies. Thus,
further capital account liberalization could sigtnificantly foster trade.