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Sequencing of reforms, financial globalization, and macroeconomic vulnerability

  • Edwards, Sebastian
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    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. J. Japanese Int. Economies 23 (2) (2009) 131-148.

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    Article provided by Elsevier in its journal Journal of the Japanese and International Economies.

    Volume (Year): 23 (2009)
    Issue (Month): 2 (June)
    Pages: 131-148

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    Handle: RePEc:eee:jjieco:v:23:y:2009:i:2:p:131-148
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622903

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    1. Gian Milesi-Ferretti & Assaf Razin, 1998. "Current Account Reversals and Currency Crises; Empirical Regularities," IMF Working Papers 98/89, International Monetary Fund.
    2. 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.
    3. Sebastian Edwards, 2007. "Capital Controls, Capital Flow Contractions, and Macroeconomic Vulnerability," NBER Working Papers 12852, National Bureau of Economic Research, Inc.
    4. 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.
    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. Sebastian Edwards, 2004. "Financial Openness, Sudden Stops and Current Account Reversals," NBER Working Papers 10277, National Bureau of Economic Research, Inc.
    7. Barry J. Eichengreen & Poonam Gupta & Ashoka Mody, 2006. "Sudden Stops and IMF-Supported Programs," IMF Working Papers 06/101, International Monetary Fund.
    8. Funke, Norbert, 1993. "Timing and Sequencing of Reforms: Competing Views and the Role of Credibility," Kyklos, Wiley Blackwell, vol. 46(3), pages 337-62.
    9. Cavallo, Eduardo A. & Frankel, Jeffrey A., 2008. "Does openness to trade make countries more vulnerable to sudden stops, or less? Using gravity to establish causality," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1430-1452, December.
    10. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
    11. Natalia T. Tamirisa & R. B. Johnston, 1998. "Why Do Countries Use Capital Controls?," IMF Working Papers 98/181, International Monetary Fund.
    12. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," Research Department Publications 4367, Inter-American Development Bank, Research Department.
    13. Eduardo Levy Yeyati, 2006. "Financial dollarization: evaluating the consequences," Economic Policy, CEPR;CES;MSH, vol. 21(45), pages 61-118, 01.
    14. Edwards, Sebastián, 2007. "Crises and growth : a Latin American perspective," IFCS - Working Papers in Economic History.WH wp07-07, Universidad Carlos III de Madrid. Instituto Figuerola.
    15. Edwards, Sebastian, 1998. "Openness, Productivity and Growth: What Do We Really Know?," Economic Journal, Royal Economic Society, vol. 108(447), pages 383-98, March.
    16. Edwards, Sebastian, 2007. "Crises and Growth: A Latin American Perspective," Revista de Historia Económica, Cambridge University Press, vol. 25(01), pages 19-51, January.
    17. Funke, Norbert, 1993. "Timing and sequencing of reforms: Competing views," Kiel Working Papers 552, Kiel Institute for the World Economy (IfW).
    18. 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.
    19. Joshua Aizenman & Ilan Noy, 2004. "Endogenous Financial and Trade Openness," NBER Working Papers 10496, National Bureau of Economic Research, Inc.
    20. Sebastian Edwards, 2001. "Does the Current Account Matter?," NBER Working Papers 8275, National Bureau of Economic Research, Inc.
    21. 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.
    22. Amemiya, Takeshi, 1978. "The Estimation of a Simultaneous Equation Generalized Probit Model," Econometrica, Econometric Society, vol. 46(5), pages 1193-1205, September.
    23. 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.
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