The IMF and the Liberalization of Capital Flows

Using data from a panel of developing economies from the 1982-98 period, the claim that the International Monetary Fund precipitated financial crises during the 1990s by pressuring countries to liberalize their capital accounts prematurely is evaluated. Examining whether the changes in the regime governing capital flows took place during participation in IMF programs, evidence finds that IMF program participation is correlated with capital account liberalization episodes during the 1990s. Alternative indicators of capital account openness were used to test the robustness of the results by comparing the economic and financial characteristics of countries that decontrolled during IMF programs with those of countries who did so independently to determine whether decontrol was premature.