Sequencing of Reforms, Financial Globalization, and Macroeconomic Vulnerability

36 Pages Posted: 8 Oct 2008 Last revised: 26 Oct 2022

See all articles by Sebastian Edwards

Sebastian Edwards

University of California, Los Angeles (UCLA) - Global Economics and Management (GEM) Area; National Bureau of Economic Research (NBER)

Date Written: October 2008

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.

Suggested Citation

Edwards, Sebastian, Sequencing of Reforms, Financial Globalization, and Macroeconomic Vulnerability (October 2008). NBER Working Paper No. w14384, Available at SSRN: https://ssrn.com/abstract=1278457

Sebastian Edwards (Contact Author)

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