Working Paper: NBER ID: w11170
Authors: Sebastian Edwards
Abstract: 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.
Keywords: capital controls; sudden stops; current account reversals
JEL Codes: F30; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital controls (F38) | incidence of external crises (H12) |
| higher capital mobility (F20) | incidence of external crises (H12) |
| higher capital mobility (F20) | decline in growth (once a crisis occurs) (F44) |
| sudden stops (F32) | decline in growth (O49) |
| current account reversals (F32) | decline in growth (O49) |