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Capital account liberalization and disinflation in the 1990s

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  • William C. Gruben
  • Darryl McLeod

Abstract

This paper addresses the potential link between two relatively surprising international economic trends of the 1990s. The first is global disinflation. Why did inflation fall so quickly, even in countries with long histories of high inflation? Latin America?s average inflation rate, for example, fell from over 400% in 1990 to under 10% in 1999. A second puzzle is why so many countries opened their capital accounts in the 1990s, despite warnings regarding the risk of currency and banking crises. Are these two developments related? Does capital account liberalization facilitate disinflation by raising the penalties for excess money creation? David Romer (1993) explores a similar hypothesis for openness to trade. But whereas trade shares evolve slowly, even a landlocked country can liberalize its capital account more or less overnight. Did countries that opened their capital accounts in the 1990s find it easier to disinflate, and why? These are the key questions addressed in this paper.

Suggested Citation

  • William C. Gruben & Darryl McLeod, 2001. "Capital account liberalization and disinflation in the 1990s," Working Papers 0104, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:0104
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    2. Winston Moore, 2014. "Managing The Process Of Removing Capital Controls: What Does The Literature Suggest?," Journal of Economic Surveys, Wiley Blackwell, vol. 28(2), pages 209-237, April.
    3. Igor Da Silva Veiga & Helder Ferreira De Mendonça, 2014. "Financial Openness And Inflationtargeting: An Analysis For The Unpleasant Fiscal Arithmetic," Anais do XL Encontro Nacional de Economia [Proceedings of the 40th Brazilian Economics Meeting] 059, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    4. Florian Neagu, 2003. "Net Foreign Assets Management and Capital Account Liberalization. The Romanian Case," International Finance 0310002, University Library of Munich, Germany.
    5. Lekshmi Nair, 2012. "Policy Disciplining Effect of Capital Account Openness in India," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 19(1), pages 43-57, September.
    6. Axel Dreher & Lars-H.R. Siemers, 2003. "The Intriguing Nexus Between Corruption and Capital Account Restrictions," Development and Comp Systems 0306004, University Library of Munich, Germany, revised 07 Jul 2005.
    7. Lars Siemers & Axel Dreher, 2005. "The Intriguing Nexus between Corruption and Capital Account Restrictions," RWI Discussion Papers 0035, Rheinisch-Westfälisches Institut für Wirtschaftsforschung.
    8. de Mendonça, Helder Ferreira & da Silva Veiga, Igor, 2014. "A Note On Openness And Inflation Targeting: Implications For The Unpleasant Fiscal Arithmetic," Macroeconomic Dynamics, Cambridge University Press, vol. 18(5), pages 1187-1207, July.

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