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Sequencing of Reforms, Financial Globalization, and Macroeconomic Vulnerability

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  • Sebastian Edwards

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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Bibliographic Info

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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Publication status: published as Edwards, Sebastian, 2009. "Sequencing of reforms, financial globalization, and macroeconomic vulnerability," Journal of the Japanese and International Economies, Elsevier, vol. 23(2), pages 131-148, June.
Handle: RePEc:nbr:nberwo:14384

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  1. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
  2. 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.
  3. Edwards, Sebastian, 2007. "Capital controls, capital flow contractions, and macroeconomic vulnerability," Journal of International Money and Finance, Elsevier, Elsevier, vol. 26(5), pages 814-840, September.
  4. Gian Maria Milesi Ferretti & Assaf Razin, 2000. "Current Account Reversals and Currency Crises: Empirical Regularities," NBER Chapters, National Bureau of Economic Research, Inc, in: Currency Crises, pages 285-323 National Bureau of Economic Research, Inc.
  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.
  6. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, Elsevier, vol. 41(3-4), pages 351-366, November.
  7. 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, American Economic Association, vol. 44(4), pages 973-987, December.
  8. Eduardo A. Cavallo & Jeffrey Frankel, 2007. "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, or Less? Using Gravity to Establish Causality," Research Department Publications, Inter-American Development Bank, Research Department 4544, Inter-American Development Bank, Research Department.
  9. Edison, Hali J. & Warnock, Francis E., 2003. "A simple measure of the intensity of capital controls," Journal of Empirical Finance, Elsevier, Elsevier, vol. 10(1-2), pages 81-103, February.
  10. Funke, Norbert, 1993. "Timing and sequencing of reforms: Competing views," Kiel Working Papers 552, Kiel Institute for the World Economy.
  11. Amemiya, Takeshi, 1978. "The Estimation of a Simultaneous Equation Generalized Probit Model," Econometrica, Econometric Society, Econometric Society, vol. 46(5), pages 1193-1205, September.
  12. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals, and Sudden Stops," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 1-49, June.
  13. Sebastian Edwards, 1997. "Openness, Productivity and Growth: What Do We Really Know?," NBER Working Papers 5978, National Bureau of Economic Research, Inc.
  14. Joshua Aizenman & Ilan Noy, 2004. "Endogenous Financial and Trade Openness," NBER Working Papers 10496, National Bureau of Economic Research, Inc.
  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.
  16. Sebastian Edwards, 2004. "Financial Openness, Sudden Stops and Current Account Reversals," NBER Working Papers 10277, National Bureau of Economic Research, Inc.
  17. Barry Eichengreen & Poonam Gupta & Ashoka Mody, 2008. "Sudden Stops and IMF-Supported Programs," NBER Chapters, National Bureau of Economic Research, Inc, in: Financial Markets Volatility and Performance in Emerging Markets, pages 219-266 National Bureau of Economic Research, Inc.
  18. 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.
  19. Eduardo Levy Yeyati, 2005. "Financial Dollarisation: Evaluating The Consequences," Business School Working Papers, Universidad Torcuato Di Tella findollarisation, Universidad Torcuato Di Tella.
  20. Glick, R. & Hutchison, M., 2000. "Capital Controls and Exchange Rate Instability in Developing Countries," Papers, Economisch Institut voor het Midden en Kleinbedrijf- pb00-05, Economisch Institut voor het Midden en Kleinbedrijf-.
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Cited by:
  1. Frankel, Jeffrey, 2011. "Monetary Policy in Emerging Markets: A Survey," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp11-003, Harvard University, John F. Kennedy School of Government.
  2. Aidi, Wafa, 2013. "Optima exchange crisis regression and twin crisis: Evidences for some MENA countries," Economic Modelling, Elsevier, Elsevier, vol. 33(C), pages 306-311.
  3. 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," Working Papers, Institute of Empirical Economic Research 79, Institute of Empirical Economic Research.
  4. Chang, Chia-Ying, 2013. "Capital controls, capital flows, and banking crises," Working Paper Series, Victoria University of Wellington, School of Economics and Finance 2979, Victoria University of Wellington, School of Economics and Finance.
  5. Calderon, Cesar & Kubota, Megumi, 2011. "Sudden stops : are global and local investors alike ?," Policy Research Working Paper Series, The World Bank 5569, The World Bank.
  6. Roberto Meurer, 2011. "Measuring the impact of financial flows on macroeconomic variables: the case of Brazil after the 2008 crisis," Working Papers, Universidade Federal do Paraná, Department of Economics 0117, Universidade Federal do Paraná, Department of Economics.

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