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Sequencing of reforms, financial globalization, and macroeconomic vulnerability

In: Financial Globalization, 20th Anniversary Conference, NBER-TCER-CEPR

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  • Sebastian Edwards

Abstract

I use a large cross country data set and panel probit analysis to investigate the way in which the interaction between trade and financial openness affect the probability of external crises. This analysis is related to debate on the adequate sequencing of reform. I also investigate the role played by current account and fiscal imbalances, contagion, international reserves holdings, and the exchange rate regime as possible determinants of external crises. The results indicate that relaxing capital controls increases the likelihood of a country experiencing a sudden stop. Moreover, the results suggest that "financial liberalization first" strategies increase the degree of vulnerability to external crises. This is particularly the case if this strategy is pursued with pegged exchange rates and if it results in large current account imbalances.

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This chapter was published in:

  • Takeo Hoshi & Takatoshi Ito, 2009. "Financial Globalization, 20th Anniversary Conference, NBER-TCER-CEPR," NBER Books, National Bureau of Economic Research, Inc, number hosh07-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12017.

    Handle: RePEc:nbr:nberch:12017

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, Elsevier, vol. 41(3-4), pages 351-366, November.
    2. Sebastian Edwards, 2004. "Financial Openness, Sudden Stops, and Current-Account Reversals," American Economic Review, American Economic Association, American Economic Association, vol. 94(2), pages 59-64, May.
    3. Barry Eichengreen & Poonam Gupta & Ashoka Mody, 2008. "Sudden Stops and IMF-Supported Programs," NBER Chapters, in: Financial Markets Volatility and Performance in Emerging Markets, pages 219-266 National Bureau of Economic Research, Inc.
    4. Jeffrey A. Frankel & Eduardo A. Cavallo, 2004. "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, Or Less? Using Gravity to Establish Causality," NBER Working Papers 10957, National Bureau of Economic Research, Inc.
    5. Gian Maria Milesi Ferretti & Assaf Razin, 2000. "Current Account Reversals and Currency Crises: Empirical Regularities," NBER Chapters, in: Currency Crises, pages 285-323 National Bureau of Economic Research, Inc.
    6. Eduardo Levy Yeyati, 2005. "Financial Dollarisation: Evaluating The Consequences," Business School Working Papers, Universidad Torcuato Di Tella findollarisation, Universidad Torcuato Di Tella.
    7. Edwards, Sebastian, 1998. "Openness, Productivity and Growth: What Do We Really Know?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 108(447), pages 383-98, March.
    8. Funke, Norbert, 1993. "Timing and sequencing of reforms: Competing views," Kiel Working Papers 552, Kiel Institute for the World Economy.
    9. Sebastian Edwards, 2007. "Capital Controls, Capital Flow Contractions, and Macroeconomic Vulnerability," NBER Working Papers 12852, National Bureau of Economic Research, Inc.
    10. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals, and Sudden Stops," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 1-49, June.
    11. Glick, R. & Hutchison, M., 2000. "Capital Controls and Exchange Rate Instability in Developing Countries," Papers, Economisch Institut voor het Midden en Kleinbedrijf- pb00-05, Economisch Institut voor het Midden en Kleinbedrijf-.
    12. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," IDB Publications 6516, Inter-American Development Bank.
    13. Edison, Hali J. & Warnock, Francis E., 2003. "A simple measure of the intensity of capital controls," Journal of Empirical Finance, Elsevier, Elsevier, vol. 10(1-2), pages 81-103, February.
    14. Menzie D. Chinn & Hiro Ito, 2002. "Capital Account Liberalization, Institutions and Financial Development: Cross Country Evidence," NBER Working Papers 8967, National Bureau of Economic Research, Inc.
    15. Sebastian Edwards, 2007. "Crises and growth : a Latin American perspective," Working Papers in Economic History wp07-07, Universidad Carlos III, Departamento de Historia Económica e Instituciones.
    16. Joshua Aizenman & Ilan Noy, 2009. "Endogenous Financial and Trade Openness," Review of Development Economics, Wiley Blackwell, Wiley Blackwell, vol. 13(2), pages 175-189, 05.
    17. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
    18. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc.
    19. Dani Rodrik, 2006. "Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank's Economic Growth in the 1990s: Learning from a Decade of Reform," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 973-987, December.
    20. Amemiya, Takeshi, 1978. "The Estimation of a Simultaneous Equation Generalized Probit Model," Econometrica, Econometric Society, Econometric Society, vol. 46(5), pages 1193-1205, September.
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    Cited by:
    1. Roberto Meurer, 2011. "Measuring the impact of financial flows on macroeconomic variables: the case of Brazil after the 2008 crisis," Working Papers, Universidade Federal do Paraná, Department of Economics 0117, Universidade Federal do Paraná, Department of Economics.
    2. Chang, Chia-Ying, 2013. "Capital controls, capital flows, and banking crises," Working Paper Series, Victoria University of Wellington, School of Economics and Finance 2979, Victoria University of Wellington, School of Economics and Finance.
    3. Aidi, Wafa, 2013. "Optima exchange crisis regression and twin crisis: Evidences for some MENA countries," Economic Modelling, Elsevier, Elsevier, vol. 33(C), pages 306-311.
    4. Calderón, César & Kubota, Megumi, 2013. "Sudden stops: Are global and local investors alike?," Journal of International Economics, Elsevier, Elsevier, vol. 89(1), pages 122-142.
    5. Jeffrey A. Frankel, 2010. "Monetary Policy in Emerging Markets: A Survey," NBER Working Papers 16125, National Bureau of Economic Research, Inc.
    6. Nannette Lindenberg & Frank Westermann, 2009. "How Strong is the Case for Dollarization in Costa Rica? A Note on the Business Cycle Comovements with the United States," CESifo Working Paper Series 2785, CESifo Group Munich.

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