Capital Controls and Exchange Rate Instability in Developing Economies

UCSC Dept. of Economics Working Paper No. 489

37 Pages Posted: 8 Nov 2001

See all articles by Michael M. Hutchison

Michael M. Hutchison

University of California, Santa Cruz - Department of Economics

Reuven Glick

Federal Reserve Bank of San Francisco - Center for Pacific Basin Monetary & Economic Studies

Date Written: December 2000

Abstract

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.

Keywords: Currency Crises, Balance of Payments Crises, Capital Controls

JEL Classification: F34, F15, F2, F31, G15, G18

Suggested Citation

Hutchison, Michael M. and Glick, Reuven, Capital Controls and Exchange Rate Instability in Developing Economies (December 2000). UCSC Dept. of Economics Working Paper No. 489. Available at SSRN: https://ssrn.com/abstract=288843 or http://dx.doi.org/10.2139/ssrn.288843

Michael M. Hutchison (Contact Author)

University of California, Santa Cruz - Department of Economics ( email )

Social Sciences I
Santa Cruz, CA 95064
United States
831-459-2600 (Phone)
831-459-5900 (Fax)

Reuven Glick

Federal Reserve Bank of San Francisco - Center for Pacific Basin Monetary & Economic Studies ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-3184 (Phone)
415-974-2168 (Fax)

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