Advanced Search
MyIDEAS: Login to save this paper or follow this series

Is Financial Openness a Bad Thing? An Analysis on the Correlation Between Financial Liberalization and the Output Performance of Crisis-Hit Economies

Contents:

Author Info

  • Ito, Hiro
Registered author(s):

Abstract

This paper investigates the link between capital account openness and the output cost associated with a currency crisis. Although the Malaysian experience during the Asian crisis of 1997-98 made many researchers and policy makers interested in the effectiveness of a policy restricting cross-border financial transactions to minimize the output cost, this association has not been exposed to a thorough empirical investigation. The probit analysis in this paper shows that the higher the level of financial openness is, the less likely countries are to experience a currency crisis among industrialized and less developed countries. It is found that a higher level of financial openness prior to a crisis helps to reduce output losses for industrialized countries, but not for less developed or emerging market countries. It is also shown that the duration of post-crisis output contraction can be shorter when an industrialized country has a high level of financial openness, but for the group of EMGs the duration of output contraction can be lengthened if a country has more open capital accounts. However, once the country encounters a currency crisis, the effect of capital account openness differs depending on the level of development. The post-crisis level of financial openness helps industrialized countries to reduce the magnitude of output losses while it increases post-crisis output losses for emerging market and less developed countries. A higher rate of financial liberalization is also found to be detrimental to less developed countries. When the dynamics of output gaps after a crisis are investigated, it is found that the negative effect of a higher level of capital account openness lasts for at least three years for emerging market countries. In general, I have found that institutional development such as corruption, law and order, and bureaucratic quality, rather than the level of openness in financial markets, is important in lowering the size of post-crisis output losses for the groups of less developed or emerging market countries. Only the group of IDCs appears to be able to reap the effect of capital account liberalization in terms of reducing the size of post-crisis output losses. Moreover, Mahathir’s type of capital restriction policy immediately after the breakout of a crisis does not appear to be effective.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.escholarship.org/uc/item/5zb2v4c5.pdf;origin=repeccitec
Download Restriction: no

Bibliographic Info

Paper provided by Center for International Economics, UC Santa Cruz in its series Santa Cruz Center for International Economics, Working Paper Series with number qt5zb2v4c5.

as in new window
Length:
Date of creation: 01 Aug 2004
Date of revision:
Handle: RePEc:cdl:scciec:qt5zb2v4c5

Contact details of provider:
Web page: http://www.escholarship.org/repec/sccie/
More information through EDIRC

Related research

Keywords: Currency crisis; banking crisis; capital controls; financial liberalization;

Other versions of this item:

References

References listed on IDEAS
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.:
as in new window
  1. Roberto Chang & Andres Velasco, 1999. "Liquidity crises in emerging markets: Theory and policy," Working Paper 99-15, Federal Reserve Bank of Atlanta.
  2. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  3. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  4. Graciela Laura Kaminsky, 1997. "Leading Indicators of Currency Crises," IMF Working Papers 97/79, International Monetary Fund.
  5. Hali J. Edison & Francis E. Warnock, 2001. "A simple measure of the intensity of capital controls," International Finance Discussion Papers 708, Board of Governors of the Federal Reserve System (U.S.).
  6. Joshua Aizenman, 2002. "Financial Opening: Evidence and Policy Options," NBER Working Papers 8900, National Bureau of Economic Research, Inc.
  7. Hali J. Edison & Carmen M. Reinhart, 2000. "Capital controls during financial crises: the case of Malaysia and Thailand," International Finance Discussion Papers 662, Board of Governors of the Federal Reserve System (U.S.).
  8. Kaplan, Ethan & Rodrik, Dani, 2001. "Did the Malaysian Capital Controls Work?," Working Paper Series rwp01-008, Harvard University, John F. Kennedy School of Government.
  9. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
  10. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis?," Temi di discussione (Economic working papers) 343, Bank of Italy, Economic Research and International Relations Area.
  11. Frankel, Jeffrey A & Rose, Andrew K, 1996. "Currency Crashes in Emerging Markets: Empirical Indicators," CEPR Discussion Papers 1349, C.E.P.R. Discussion Papers.
  12. Leonardo Bartolini & Allan Drazen, 1996. "Capital Account Liberalization as a Signal," NBER Working Papers 5725, National Bureau of Economic Research, Inc.
  13. Isriya Nitithanprapas & Sunil Rongala & Thomas D. Willett, 2002. "The Role of Capital Controls and Currency Regimes in the Asian Crisis," Claremont Colleges Working Papers 2002-21, Claremont Colleges.
  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. Reuven Glick & Ramon Moreno & Mark Spiegel, 2001. "Financial crises in emerging markets," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar.23.
  16. De Gregorio, Jose & Edwards, Sebastian & Valdes, Rodrigo O., 2000. "Controls on capital inflows: do they work?," Journal of Development Economics, Elsevier, vol. 63(1), pages 59-83, October.
  17. Sebastian Edwards, 2001. "Capital Mobility and Economic Performance: Are Emerging Economies Different?," NBER Working Papers 8076, National Bureau of Economic Research, Inc.
  18. Rudi Dornbusch, 2001. "Malaysia: Was it Different?," NBER Working Papers 8325, National Bureau of Economic Research, Inc.
  19. Barry Eichengreen & David Leblang, 2003. "Capital Account Liberalization and Growth: Was Mr. Mahathir Right?," NBER Working Papers 9427, National Bureau of Economic Research, Inc.
  20. Michael M Hutchison & Ilan Noy, 2002. "Output Costs of Currency and Balance of Payments Crises in Emerging Markets," Comparative Economic Studies, Palgrave Macmillan, vol. 44(2-3), pages 27-44, September.
  21. Sebastian Edwards, 1999. "Crisis Prevention: Lessons from Mexico and East Asia," NBER Working Papers 7233, National Bureau of Economic Research, Inc.
  22. Honohan, Patrick & Klingebiel, Daniela, 2003. "The fiscal cost implications of an accommodating approach to banking crises," Journal of Banking & Finance, Elsevier, vol. 27(8), pages 1539-1560, August.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Wei Huang, 2006. "Emerging Markets, Financial Openness and Financial Development," Bristol Economics Discussion Papers 06/588, Department of Economics, University of Bristol, UK.
  2. Chinn, Menzie D. & Ito, Hiro, 2006. "What matters for financial development? Capital controls, institutions, and interactions," Journal of Development Economics, Elsevier, vol. 81(1), pages 163-192, October.
  3. Hiro Ito & Menzie Chinn, 2007. "Price-Based Measurement Of Financial Globalization: A Cross-Country Study Of Interest Rate Parity," Pacific Economic Review, Wiley Blackwell, vol. 12(4), pages 419-444, October.
  4. Ito, Hiro, 2006. "Financial development and financial liberalization in Asia: Thresholds, institutions and the sequence of liberalization," The North American Journal of Economics and Finance, Elsevier, vol. 17(3), pages 303-327, December.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cdl:scciec:qt5zb2v4c5. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lisa Schiff).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.