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Evaluation of Currency Regimes: The Unique Role of Sudden Stops

  • Assaf Razin
  • Yona Rubinstein

This paper tackles two established puzzles in international macroeconomics literature. The first is the lack of systematic difference in the macroeconomic performance across exchange rate regimes. The second is the absence of a clear empirical relationship between macroeconomic performance and capital-account liberalization. We suggest that both may appear because empirical methodologies fail to account for a latent economic "crisis state," influenced by exchange-rate and capital account regimes, and to allow the effects of a policy regime on growth to depend on whether the economy is in a crisis-prone latent state. In practice, we model and estimate the latent state of the economy as a crisis probability. In the framework we propose, exchange rate and capital market liberalization regimes can have both a direct effect on short-term growth, and an indirect effect on growth that is channelled through their effects on the crisis probability.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11785.

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Date of creation: Nov 2005
Publication status: published as Assaf Razin & Yona Rubinstein, 2006. "Evaluation of currency regimes: the unique role of sudden stops," Economic Policy, CEPR, CES, MSH, vol. 21(45), pages 119-152, 01.
Handle: RePEc:nbr:nberwo:11785
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  1. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2004. "Financial Globalization and Exchange Rates," CEPR Discussion Papers 4745, C.E.P.R. Discussion Papers.
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  13. Kristin J. Forbes, 2005. "The Microeconomic Evidence on Capital Controls: No Free Lunch," NBER Working Papers 11372, National Bureau of Economic Research, Inc.
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  15. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
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  29. Torsten M Sloek & Michael W Klein & Luca A Ricci & Hali J Edison, 2002. "Capital Account Liberalization and Economic Performance; Survey and Synthesis," IMF Working Papers 02/120, International Monetary Fund.
  30. Martin Schneider & Aaron Tornell, 2000. "Balance SHeet Effects, Bailout Guarantees and Financial Crises," NBER Working Papers 8060, National Bureau of Economic Research, Inc.
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