Working Paper: CEPR ID: DP2724
Authors: Charles Wyplosz
Abstract: This Paper looks at the effect of domestic and external financial liberalization. Using a sample of 27 developing and developed countries, it studies the exchange market pressure and output gap effects of liberalization. The results show that developing and developed countries differ in many respects. By and large, the effects are significantly stronger in developing countries. Exchange market pressure to be strongly positive as capital flows, but reversals seem to follow systematically. Similarly, the behaviour of the output gap corresponds well to boom and bust cycles. The Paper concludes with a discussion of policy measures desirable to make liberalization safer than it has been so far.
Keywords: currency crises; liberalization; sequencing
JEL Codes: E40; F30; F40; G20; O10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial liberalization (F30) | Exchange market pressure (F31) |
| Removal of domestic and external financial restrictions (F32) | Exchange market pressure (F31) |
| Financial liberalization (F30) | Conditions favorable for crises (H12) |
| Financial liberalization (F30) | Output gaps (E24) |
| Domestic financial restrictions (F38) | Exchange market pressure (F31) |
| Macroeconomic conditions (E66) | Output gaps (E24) |