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Currency crises, capital account liberalization, and selection bias

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  • Reuven Glick
  • Xueyan Guo
  • Michael M. Hutchison

Abstract

Are countries with unregulated capital flows more vulnerable to currency crises? Efforts to answer this question properly must control for \"self selection\" bias since countries with liberalized capital accounts may also have more sound economic policies and institutions that make them less likely to experience crises. We employ a matching and propensity score methodology to address this issue in a panel analysis of developing countries. Our results suggest that, after controlling for sample selection bias, countries with liberalized capital accounts experience a lower likelihood of currency crises. That is, when two countries have the same likelihood of allowing free movement of capital (based on historical evidence and a very similar set of economic and political characteristics) - and one country imposes controls and the other does not - the country without controls has a lower likelihood of experiencing a currency crisis.

Suggested Citation

  • Reuven Glick & Xueyan Guo & Michael M. Hutchison, 2005. "Currency crises, capital account liberalization, and selection bias," Working Paper Series 2004-15, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfwp:2004-15
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    References listed on IDEAS

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    Keywords

    Financial crises; Capital;

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