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Capital Controls, Sudden Stops and Current Account Reversals

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  • Sebastian Edwards

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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Publication status: published as Capital Controls, Sudden Stops, and Current Account Reversals , Sebastian Edwards. in Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences , Edwards. 2007
Handle: RePEc:nbr:nberwo:11170

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  34. Sebastian Edwards & Eduardo Levy Yeyati, 2003. "Flexible Exchange Rates as Shock Absorbers," NBER Working Papers 9867, National Bureau of Economic Research, Inc.
  35. Kaplan, Ethan & Rodrik, Dani, 2001. "Did the Malaysian Capital Controls Work?," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp01-008, Harvard University, John F. Kennedy School of Government.
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  50. Michael P. Dooley, 1995. "A Survey of Academic Literatureon Controls Over International Capital Transactions," IMF Working Papers 95/127, International Monetary Fund.
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