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Sequencing of Reforms, Financial Globalization, and Macroeconomic Vulnerability

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Author Info
Sebastian Edwards

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14384.

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Date of creation: Oct 2008
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Handle: RePEc:nbr:nberwo:14384

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Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
F31 - International Economics - - International Finance - - - Foreign Exchange
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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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.:
  1. Amemiya, Takeshi, 1978. "The Estimation of a Simultaneous Equation Generalized Probit Model," Econometrica, Econometric Society, vol. 46(5), pages 1193-1205, September. [Downloadable!] (restricted)
  2. 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)
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  3. 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)
  4. Sebastian Edwards, 2007. "Capital Controls, Capital Flow Contractions, and Macroeconomic Vulnerability," NBER Working Papers 12852, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics. [Downloadable!]
  6. 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. [Downloadable!]
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  7. Glick, R. & Hutchison, M., 2000. "Capital Controls and Exchange Rate Instability in Developing Countries," Papers pb00-05, Economisch Institut voor het Midden en Kleinbedrijf-.
    Other versions:
  8. 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.
  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. [Downloadable!] (restricted)
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  10. 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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  11. Guillermo A. Calvo & Alejandro Izquierdo & Luis-Fernando Mejia, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," NBER Working Papers 10520, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Sebastian Edwards, 2004. "Financial Openness, Sudden Stops, and Current-Account Reversals," American Economic Review, American Economic Association, vol. 94(2), pages 59-64, May. [Downloadable!]
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  13. Gian Maria Milesi Ferretti & Assaf Razin, 2000. "Current Account Reversals and Currency Crises, Empirical Regularities," NBER Chapters, in: Currency Crises, pages 285-326 National Bureau of Economic Research, Inc. [Downloadable!]
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  14. 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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  15. 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. [Downloadable!] (restricted)
  16. Eduardo Levy Yeyati, 2006. "Financial dollarization: evaluating the consequences," Economic Policy, CEPR, CES, MSH, vol. 21(45), pages 61-118, 01. [Downloadable!] (restricted)
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  17. Edison, Hali J. & Warnock, Francis E., 2003. "A simple measure of the intensity of capital controls," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 81-103, February. [Downloadable!] (restricted)
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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. 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 CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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