Capital Controls and Exchange Rate Instability in Developing Economies
Michael M. Hutchison
University of California, Santa Cruz - Department of Economics
Federal Reserve Bank of San Francisco - Center for Pacific Basin Monetary & Economic Studies
UCSC Dept. of Economics Working Paper No. 489
A large literature on the appropriate sequencing of financial liberalization suggests that removing capital controls prematurely may contribute to currency instability. This paper investigates whether legal restrictions on international capital flows are associated with greater currency stability. We employ a comprehensive panel data set of 69 developing economies over the 1975-1997 period, identifying 160 currency crises. We control for macroeconomic, political, and institutional characteristics that influence the probability of a currency crisis, employ alternative measures of restrictions on international payments, and account for possible joint causality between the likelihood of a currency attack and the imposition of capital controls. We find in every model specification that restrictions on capital flows do not insulate economies from currency problems; rather, they appear to increase the vulnerability of economies to speculative attack.
Number of Pages in PDF File: 37
Keywords: Currency Crises, Balance of Payments Crises, Capital Controls
JEL Classification: F34, F15, F2, F31, G15, G18working papers series
Date posted: November 8, 2001
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