Working Paper: NBER ID: w14384
Authors: Sebastian Edwards
Abstract: I use a large cross country data set and panel probit analysis to investigate the way in which the interaction between trade and financial openness affect the probability of external crises. This analysis is related to debate on the adequate sequencing of reform. I also investigate the role played by current account and fiscal imbalances, contagion, international reserves holdings, and the exchange rate regime as possible determinants of external crises. The results indicate that relaxing capital controls increases the likelihood of a country experiencing a sudden stop. Moreover, the results suggest that "financial liberalization first" strategies increase the degree of vulnerability to external crises. This is particularly the case if this strategy is pursued with pegged exchange rates and if it results in large current account imbalances.
Keywords: Financial Globalization; Macroeconomic Vulnerability; Reform Sequencing
JEL Codes: F30; F31; F32; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Relaxing capital controls (F38) | likelihood of a country experiencing a sudden stop in capital inflows (F32) |
| Relaxing capital controls (F38) | sudden stops in capital inflows (F32) |
| Financial liberalization first strategies (F30) | vulnerability to crises (H12) |
| Financial liberalization first strategies (under pegged exchange rates) (F31) | large current account imbalances (F32) |