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Capital Controls, Sudden Stops and Current Account Reversals

  • Sebastian Edwards

In this paper I use a broad multi-country data set to analyze the relationship between restrictions to capital mobility and external crises. The analysis focuses on two manifestations of external crises: (a) sudden stops of capital inflows; and (b) current account reversals. I deal with two important policy-related issues: First, does the extent of capital mobility affect countries' degree of vulnerability to external crises; and second, does the extent of capital mobility determine the depth of external crises -- as measured by the decline in growth -- once the crises occur? Overall, my results cast some doubts on the assertion that increased capital mobility has caused heightened macroeconomic vulnerabilities. I find no systematic evidence suggesting that countries with higher capital mobility tend to have a higher incidence of crises, or tend to face a higher probability of having a crisis, than countries with lower mobility. My results do suggest, however, that once a crisis occurs, countries with higher capital mobility may face a higher cost, in terms of growth decline.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11170.

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Date of creation: Mar 2005
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Publication status: published as Capital Controls, Sudden Stops, and Current Account Reversals , Sebastian Edwards. in Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences , Edwards. 2007
Handle: RePEc:nbr:nberwo:11170
Note: IFM
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  1. Sebastian Edwards, 2000. "Interest Rates, Contagion and Capital Controls," NBER Working Papers 7801, National Bureau of Economic Research, Inc.
  2. Michael P. Dooley, 1995. "A Survey of Academic Literatureon Controls Over International Capital Transactions," IMF Working Papers 95/127, International Monetary Fund.
  3. Sebastian Edwards, 1998. "Capital Flows, Real Exchange Rates, and Capital Controls: Some Latin American Experiences," NBER Working Papers 6800, National Bureau of Economic Research, Inc.
  4. Acemoglu, Daron & Johnson, Simon & Robinson, James A & Thaicharoen, Yunyong, 2002. "Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth," CEPR Discussion Papers 3575, C.E.P.R. Discussion Papers.
  5. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2005. "Does financial liberalization spur growth?," Journal of Financial Economics, Elsevier, vol. 77(1), pages 3-55, July.
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  7. Heckman, James J, 1978. "Dummy Endogenous Variables in a Simultaneous Equation System," Econometrica, Econometric Society, vol. 46(4), pages 931-59, July.
  8. Barry Eichengreen & David Leblang, 2003. "Capital Account Liberalization and Growth: Was Mr. Mahathir Right?," NBER Working Papers 9427, National Bureau of Economic Research, Inc.
  9. Joshua D. Angrist, 2000. "Estimation of Limited-Dependent Variable Models with Dummy Endogenous Regressors: Simple Strategies for Empirical Practice," NBER Technical Working Papers 0248, National Bureau of Economic Research, Inc.
  10. Milesi-Ferretti, Gian Maria & Razin, Assaf, 1998. "Current Account Reversals and Currency Crises: Empirical Regularities," CEPR Discussion Papers 1921, C.E.P.R. Discussion Papers.
  11. Pierre-Olivier Gourinchas & Olivier Jeanne, 2006. "The Elusive Gains from International Financial Integration," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 715-741.
  12. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons," IDB Publications (Working Papers) 6821, Inter-American Development Bank.
  13. 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.
  14. Liliana Rojas-Suárez & Donald J. Mathieson & Michael P. Dooley, 1996. "Capital Mobility and Exchange Market Intervention in Developing Countries," IMF Working Papers 96/131, International Monetary Fund.
  15. Sebastian Edwards, 1997. "Openness, Productivity and Growth: What Do We Really Know?," NBER Working Papers 5978, National Bureau of Economic Research, Inc.
  16. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
  17. Sebastian Edwards & Jeffrey A. Frankel, 2002. "Preventing Currency Crises in Emerging Markets," NBER Books, National Bureau of Economic Research, Inc, number edwa02-2, 07.
  18. Glick, Reuven & Hutchison, Michael, 2005. "Capital controls and exchange rate instability in developing economies," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 387-412, April.
  19. Michael W. Klein, 2005. "Capital Account Liberalization, Institutional Quality and Economic Growth: Theory and Evidence," NBER Working Papers 11112, National Bureau of Economic Research, Inc.
  20. 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.
  21. 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.
  22. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  23. Forbes, Kristin J., 2003. "One Cost of the Chilean Capital Controls: Increased Financial Constraints for Smaller Traded Firms," Working papers 4273-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  24. Sebastian Edwards, 2002. "Does the Current Account Matter?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 21-76 National Bureau of Economic Research, Inc.
  25. Reuven Glick & Michael M. Hutchison, . "Banking and Currency Crises: How Common Are Twins?," EPRU Working Paper Series 99-20, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  26. Mody, Ashoka & Murshid, Antu Panini, 2005. "Growing up with capital flows," Journal of International Economics, Elsevier, vol. 65(1), pages 249-266, January.
  27. Geert Bekaert & Campbell R. Harvey, 1998. "Capital Flows and the Behavior of Emerging Market Equity Returns," NBER Working Papers 6669, National Bureau of Economic Research, Inc.
  28. Michael W. Klein & Giovanni Olivei, 1999. "Capital Account Liberalization, Financial Depth and Economic Growth," NBER Working Papers 7384, National Bureau of Economic Research, Inc.
  29. Mihir A. Desai & C. Fritz Foley & Kristin J. Forbes, 2004. "Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Crises," NBER Working Papers 10545, National Bureau of Economic Research, Inc.
  30. Torsten Sløk & Michael Klein & Luca Antonio Ricci & Hali J. Edison, 2002. "Capital Account Liberalization and Economic Performance; Survey and Synthesis," IMF Working Papers 02/120, International Monetary Fund.
  31. 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.
  32. Sebastian Edwards, 2004. "Financial Openness, Sudden Stops, and Current-Account Reversals," American Economic Review, American Economic Association, vol. 94(2), pages 59-64, May.
  33. Dennis P. Quinn, 2003. "Capital account liberalization and financial globalization, 1890-1999: a synoptic view," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(3), pages 189-204.
  34. Ethan Kaplan & Dani Rodrik, 2001. "Did the Malaysian Capital Controls Work?," NBER Working Papers 8142, National Bureau of Economic Research, Inc.
  35. Montiel, Peter J., 1993. "Capital mobility in developing countries : some measurement issues and empirical estimates," Policy Research Working Paper Series 1103, The World Bank.
  36. Johnson, Simon & Mitton, Todd, 2003. "Cronyism and capital controls: evidence from Malaysia," Journal of Financial Economics, Elsevier, vol. 67(2), pages 351-382, February.
  37. Sebastian Edwards & Eduardo Levy Yeyati, 2004. "Flexible Exchange Rates as Shock Absorbers," Business School Working Papers exchangerates, Universidad Torcuato Di Tella.
  38. Harberger, Arnold C, 1980. "Vignettes on the World Capital Market," American Economic Review, American Economic Association, vol. 70(2), pages 331-37, May.
  39. Bekaert, Geert, 1995. "Market Integration and Investment Barriers in Emerging Equity Markets," World Bank Economic Review, World Bank Group, vol. 9(1), pages 75-107, January.
  40. Sebastian Edwards, 1999. "How Effective Are Capital Controls?," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 65-84, Fall.
  41. Reinhart, Carmen & Montiel, Peter, 1999. "Do capital controls influence the volume and composition of capital flows? Evidence from the 1990s," MPRA Paper 13710, University Library of Munich, Germany.
  42. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
  43. Alberto Alesina & Vittorio Grilli & Gian Maria Milesi-Ferrett, 1993. "The Political Economy of Capital Controls," NBER Working Papers 4353, National Bureau of Economic Research, Inc.
  44. Rudi Dornbusch, 2001. "Malaysia: Was it Different?," NBER Working Papers 8325, National Bureau of Economic Research, Inc.
  45. Bekaert, Geert & Harvey, Campbell R, 1995. " Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-44, June.
  46. Sebastian Edwards, 2001. "Capital Mobility and Economic Performance: Are Emerging Economies Different?," NBER Working Papers 8076, National Bureau of Economic Research, Inc.
  47. 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 4544, Inter-American Development Bank, Research Department.
  48. Natalia T. Tamirisa & R. B. Johnston, 1998. "Why Do Countries Use Capital Controls?," IMF Working Papers 98/181, International Monetary Fund.
  49. Jose De Gregorio & Sebastian Edwards & Rodrigo O. Valdes, 2000. "Controls on Capital Inflows: Do they Work?," NBER Working Papers 7645, National Bureau of Economic Research, Inc.
  50. Hong, Kiseok & Tornell, Aaron, 2005. "Recovery from a currency crisis: some stylized facts," Journal of Development Economics, Elsevier, vol. 76(1), pages 71-96, February.
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  52. Jacques Miniane, 2004. "A New Set of Measures on Capital Account Restrictions," IMF Staff Papers, Palgrave Macmillan, vol. 51(2), pages 4.
  53. 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.
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