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Capital Controls, Sudden Stops and Current Account Reversals

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Author Info
Sebastian Edwards

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Abstract

In this paper I use a broad multi-country data set to analyze the relationship between restrictions to capital mobility and external crises. The analysis focuses on two manifestations of external crises: (a) sudden stops of capital inflows; and (b) current account reversals. I deal with two important policy-related issues: First, does the extent of capital mobility affect countries' degree of vulnerability to external crises; and second, does the extent of capital mobility determine the depth of external crises -- as measured by the decline in growth -- once the crises occur? Overall, my results cast some doubts on the assertion that increased capital mobility has caused heightened macroeconomic vulnerabilities. I find no systematic evidence suggesting that countries with higher capital mobility tend to have a higher incidence of crises, or tend to face a higher probability of having a crisis, than countries with lower mobility. My results do suggest, however, that once a crisis occurs, countries with higher capital mobility may face a higher cost, in terms of growth decline.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11170.

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Date of creation: Mar 2005
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Handle: RePEc:nbr:nberwo:11170

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Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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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.:
  1. Milesi-Ferretti, Gian Maria & Razin, Assaf, 1998. "Current Account Reversals and Currency Crises: Empirical Regularities," CEPR Discussion Papers 1921, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Michael P. Dooley & Donald J. Mathieson & Liliana Rojas-Suarez, 1997. "Capital Mobility and Exchange Market Intervention in Developing Countries," NBER Working Papers 6247, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. 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. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
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  7. 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. [Downloadable!] (restricted)
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  8. Sebastian Edwards, 2000. "Interest Rates, Contagion and Capital Controls," NBER Working Papers 7801, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Sebastian Edwards, 2001. "Capital Mobility and Economic Performance: Are Emerging Economies Different?," NBER Working Papers 8076, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Gourinchas, Pierre-Olivier & Jeanne, Olivier, 2003. "The Elusive Gains from International Financial Integration," CEPR Discussion Papers 3902, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  13. Joshua Aizenman & Ilan Noy, 2004. "Endogenous Financial and Trade Openness," NBER Working Papers 10496, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Sebastian Edwards, 1999. "How Effective Are Capital Controls?," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 65-84, Fall. [Downloadable!] (restricted)
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  15. Michael P. Dooley, 1995. "A Survey of Academic Literature on Controls over International Capital Transactions," NBER Working Papers 5352, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Edwards, Sebastian & Levy Yeyati, Eduardo, 2005. "Flexible exchange rates as shock absorbers," European Economic Review, Elsevier, vol. 49(8), pages 2079-2105, November. [Downloadable!] (restricted)
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  17. Michael Klein & Giovanni Olivei, 1999. "Capital account liberalization, financial depth, and economic growth," Working Papers 99-6, Federal Reserve Bank of Boston. [Downloadable!]
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  18. Sebastian Edwards, 2002. "Does the Current Account Matter?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 21-76 National Bureau of Economic Research, Inc. [Downloadable!]
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  19. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2003. "Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons," NBER Working Papers 9828, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  20. 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. [Downloadable!] (restricted)
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  21. Edwards, Sebastian, 1998. "Openness, Productivity and Growth: What Do We Really Know?," Economic Journal, Royal Economic Society, vol. 108(447), pages 383-98, March. [Downloadable!] (restricted)
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  22. Bekaert, Geert, 1995. "Market Integration and Investment Barriers in Emerging Equity Markets," World Bank Economic Review, Oxford University Press, vol. 9(1), pages 75-107, January.
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  25. Joshua Angrist, 1999. "Estimation of Limited-Dependent Variable Models with Dummy Endogenous Regressors: Simple Strategies for Empirical Practice," Working papers 99-31, Massachusetts Institute of Technology (MIT), Department of Economics.
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  27. Mihir A. Desai & C. Fritz Foley & Kristin J. Forbes, 2004. "Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Crises," NBER Working Papers 10545, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  30. Frankel, Jeffrey & Cavallo, Eduardo, 2004. "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, or Less? Using Gravity to Establish Causality," Working Paper Series rwp04-038, Harvard University, John F. Kennedy School of Government. [Downloadable!]
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  31. Michael W. Klein, 2005. "Capital Account Liberalization, Institutional Quality and Economic Growth: Theory and Evidence," NBER Working Papers 11112, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  32. 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. [Downloadable!] (restricted)
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  33. Sebastian Edwards, 2000. "Capital Flows, Real Exchange Rates, and Capital Controls: Some Latin American Experiences," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 197-254 National Bureau of Economic Research, Inc. [Downloadable!]
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  34. Barry Eichengreen & David Leblang, 2003. "Capital Account Liberalization and Growth: Was Mr. Mahathir Right?," NBER Working Papers 9427, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  35. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2005. "Does financial liberalization spur growth?," Journal of Financial Economics, Elsevier, vol. 77(1), pages 3-55, July. [Downloadable!] (restricted)
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  36. Rudi Dornbusch, 2001. "Malaysia: Was it Different?," NBER Working Papers 8325, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  40. Acemoglu, Daron & Johnson, Simon & Robinson, James & Thaicharoen, Yunyong, 2003. "Institutional causes, macroeconomic symptoms: volatility, crises and growth," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 49-123, January. [Downloadable!] (restricted)
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  43. Sebastian Edwards, 2004. "Financial Openness, Sudden Stops and Current Account Reversals," NBER Working Papers 10277, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  44. Simon Johnson & Todd Mitton, 2001. "Cronyism and Capital Controls: Evidence from Malaysia," NBER Working Papers 8521, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, 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.)

  1. M. Ayhan Kose & Eswar Prasad & Marco Terrones, 2008. "Does Openness to International Financial Flows Raise Productivity Growth?," IMF Working Papers 08/242, International Monetary Fund. [Downloadable!]
    Other versions:
  2. Fernando M. Gonçalves & Edmar L. Bacha & Márcio Holland, 2008. "Is Brazil Different? Risk, Dollarization, and Interest Rates in Emerging Markets," IMF Working Papers 07/294, International Monetary Fund. [Downloadable!]
  3. Joshua Aizenman & Yothin Jinjarak, 2006. "Globalization and Developing Countries - A Shrinking Tax Base?," NBER Working Papers 11933, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Eswar S. Prasad & Raghuram Rajan, 2008. "A Pragmatic Approach to Capital Account Liberalization," NBER Working Papers 14051, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Roberto Álvarez, 2007. "Export Transitions," Working Papers Central Bank of Chile 418, Central Bank of Chile. [Downloadable!]
  6. Joshua Aizenman & Gurnain Kaur Pasricha, 2009. "Selective Swap Arrangements and the Global Financial Crisis: Analysis and Interpretation," NBER Working Papers 14821, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Bernardina Algieri & Thierry Bracke, 2007. "Patterns of current account adjustment - insights from past experience," Working Paper Series 762, European Central Bank. [Downloadable!]
  8. Jaewoo Lee & Joshua Aizenman, 2005. "International Reserves: Precautionary vs. Mercantilist Views, Theory, and Evidence," IMF Working Papers 05/198, International Monetary Fund. [Downloadable!]
  9. Barry Eichengreen & Poonam Gupta & Ashoka Mody, 2006. "Sudden Stops and IMF-Supported Programs," NBER Working Papers 12235, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Reinhart, Carmen & Reinhart, Vincent, 2008. "Capital Flow Bonanzas: An Encompassing View of the Past and Present," CEPR Discussion Papers 6996, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  11. Gus Garita & Chen Zhou, 2009. "Can Open Capital Markets Help Avoid Currency Crises?," DNB Working Papers 205, Netherlands Central Bank, Research Department. [Downloadable!]
  12. 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. [Downloadable!]
    Other versions:
  13. Eswar Prasad & Raghuram G. Rajan & Arvind Subramanian, 2006. "Patterns of international capital flows and their implications for economic development," Proceedings, Federal Reserve Bank of Kansas City, pages 119-158. [Downloadable!]
  14. Bernardina Algieri & Thierry Bracke, 2007. "Patterns of Current Account Adjustment – Insights from Past Experience," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  15. David Hofman & Ruben Atoyan & Dimitri Tzanninis & Mauro Mecagni, 2007. "The Duration of Capital Account Crises--An Empirical Analysis," IMF Working Papers 07/258, International Monetary Fund. [Downloadable!]
  16. Edmar L. Bacha & Márcio Holland & Fernando M. Gonçalves, 2007. "Is Brazil Different? Risk, Dollarization, And Interest In Emerging Markets," Anais do XXXV Encontro Nacional de Economia [Proceedings of the 35th Brazilian Economics Meeting] 028, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
  17. Ilan Goldfajn & André Minella, 2005. "Capital Flows and Controls in Brazil: What Have We Learned?," NBER Working Papers 11640, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Bank for International Settlements, 2008. "Monetary and financial stability implications of capital flows in Latin America and the Caribbean," BIS Papers, Bank for International Settlements, number 43, 11. [Downloadable!]
  19. David Hofman & Ruben Atoyan & Mauro Mecagni, 2009. "The Persistence of Capital Account Crises," IMF Working Papers 09/103, International Monetary Fund. [Downloadable!]
  20. Irina Tytell & Selim Elekdag & Ravi Balakrishnan & Stephan Danninger, 2009. "The Transmission of Financial Stress from Advanced to Emerging Economies," IMF Working Papers 09/133, International Monetary Fund. [Downloadable!]
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