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The IMF and the Liberalization of Capital Flows

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  • Ilan Noy

    () (Department of Economics, University of Hawaii at Manoa)

  • Joseph P. Joyce

    () (Department of Economics, Wellesley College)

Abstract

We evaluate the claim that the International Monetary Fund precipitated financial crises during the 1990s by pressuring countries to liberalize their capital accounts prematurely. Using data from a panel of developing economies from 1982-98, we examine whether the changes in the regime governing capital flows took place during participation in IMF programs. We find evidence that IMF program participation is correlated with capital account liberalization episodes during the 1990s. We verify the robustness of our results using alternative indicators of capital account openness. To determine whether decontrol was premature, we compare the economic and financial characteristics of countries that decontrolled during IMF programs with those of countries who did so independently and find some evidence of IMF-led premature liberalizations.

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File URL: http://www.economics.hawaii.edu/research/workingpapers/WP_07-6.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 200706.

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Length: 34 pages
Date of creation: Jan 2007
Date of revision:
Handle: RePEc:hai:wpaper:200706

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Keywords: IMF programs; capital account liberalization;

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References

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  1. Sebastian Edwards, 2005. "Capital Controls, Sudden Stops and Current Account Reversals," NBER Working Papers 11170, National Bureau of Economic Research, Inc.
  2. Chinn, Menzie David & Ito, Hiro, 2005. "What Matters for Financial Development? Capital Controls, Institutions, and Interactions," Santa Cruz Department of Economics, Working Paper Series qt5pv1j341, Department of Economics, UC Santa Cruz.
  3. Alesina, Alberto F & Grilli, Vittorio & Milesi-Ferretti, Gian Maria, 1993. "The Political Economy of Capital Controls," CEPR Discussion Papers 793, C.E.P.R. Discussion Papers.
  4. Leonardo Bartolini & Allan Drazen, 1996. "Capital account liberalization as a signal," Staff Reports 11, Federal Reserve Bank of New York.
  5. Ilan Noy & Joseph P. Joyce, 2007. "The IMF and the Liberalization of Capital Flows," Working Papers 200706, University of Hawaii at Manoa, Department of Economics.
  6. repec:imf:imfocp:220 is not listed on IDEAS
  7. Beck, T.H.L. & Demirgüç-Kunt, A. & Levine, R., 2000. "A new database on financial development and structure," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125518, Tilburg University.
  8. Joshua Aizenman & Ilan Noy, 2003. "Endogenous Financial Openness: Efficiency and Political Economy Considerations," NBER Working Papers 10144, National Bureau of Economic Research, Inc.
  9. Conway, Patrick, 1994. "IMF lending programs: Participation and impact," Journal of Development Economics, Elsevier, vol. 45(2), pages 365-391, December.
  10. Vittorio Grilli & Gian Maria Milesi-Ferretti, 1995. "Economic Effects and Structural Determinants of Capital Controls," IMF Staff Papers, Palgrave Macmillan, vol. 42(3), pages 517-551, September.
  11. Honig, Adam, 2008. "Do improvements in government quality necessarily reduce the incidence of costly sudden stops?," Journal of Banking & Finance, Elsevier, vol. 32(3), pages 360-373, March.
  12. Ashoka Mody & Abdul Abiad, 2003. "Financial Reform: What Shakes It? What Shapes It?," IMF Working Papers 03/70, International Monetary Fund.
  13. Jacques Miniane, 2004. "A New Set of Measures on Capital Account Restrictions," IMF Staff Papers, Palgrave Macmillan, vol. 51(2), pages 4.
  14. Natalia T. Tamirisa & R. B. Johnston, 1998. "Why Do Countries Use Capital Controls?," IMF Working Papers 98/181, International Monetary Fund.
  15. Joseph P. Joyce, 2001. "Time present and time past: a duration analysis of IMF program spells," Working Papers 01-2, Federal Reserve Bank of Boston.
  16. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
  17. Haggard, Stephan & Maxfield, Sylvia, 1996. "The political economy of financial internationalization in the developing world," International Organization, Cambridge University Press, vol. 50(01), pages 35-68, December.
  18. Bird, Graham & Hussain, Mumtaz & Joyce, Joseph P., 2004. "Many happy returns? Recidivism and the IMF," Journal of International Money and Finance, Elsevier, vol. 23(2), pages 231-251, March.
  19. Michael M. Hutchison & Ilan Noy & Lidan Wang, 2007. "Fiscal and Monetary Policies and the Cost of Sudden Stops," Working Papers 200724, University of Hawaii at Manoa, Department of Economics.
  20. Joshua Aizenman & Ilan Noy, 2004. "Endogenous Financial and Trade Openness: Political Economy Considerations," Economics Study Area Working Papers 72, East-West Center, Economics Study Area, revised Sep 2004.
  21. Glick, Reuven & Hutchison, Michael, 2005. "Capital controls and exchange rate instability in developing economies," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 387-412, April.
  22. Joshua Aizenman & Ilan Noy, 2004. "Endogenous Financial and Trade Openness: Efficiency and Political Economy Considerations," Working Papers 200404, University of Hawaii at Manoa, Department of Economics.
  23. John Williamson, 2004. "The Years of Emerging Market Crises: A Review of Feldstein," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 822-837, September.
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Citations

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Cited by:
  1. Jinjarak, Y & Noy, I & Zheng, H, 2012. "Capital Controls in Brazil: Stemming a Tide with a Signal?," Working Paper Series 2391, Victoria University of Wellington, School of Economics and Finance.
  2. Noy, Ilan, 2008. "Sovereign default risk, the IMF and creditor moral hazard," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(1), pages 64-78, February.
  3. Joseph P Joyce & Ilan Noy, 2005. "The IMF and the Liberalization of Capital Flows," Economics Study Area Working Papers 84, East-West Center, Economics Study Area.
  4. Andreas Steiner, 2010. "The Accumulation of Foreign Exchange by Central Banks: Fear of Capital Mobility?," Working Papers 85, Institute of Empirical Economic Research.
  5. Eduardo A. Cavallo, 2005. "Trade, gravity, and sudden stops: on how commercial trade can increase the stability of capital flows," Working Paper 2005-23, Federal Reserve Bank of Atlanta.
  6. Kevin Gallagher, 2012. "The Global Governance of Capital Flows: New Opportunities, Enduring Challenges," Working Papers wp283, Political Economy Research Institute, University of Massachusetts at Amherst.

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