Currency Crises, Capital Account Liberalization, and Selection Bias

UC Santa Cruz International Economics Working Paper No. 04-14

31 Pages Posted: 2 Jul 2004

See all articles by Reuven Glick

Reuven Glick

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

Xueyan Guo

University of California, Santa Cruz

Michael M. Hutchison

University of California, Santa Cruz - Department of Economics

Date Written: June 2004

Abstract

Are countries with unregulated capital flows more vulnerable to currency crises? Efforts to answer this question properly must control for "self selection" bias since countries with liberalized capital accounts may also have more sound economic policies and institutions that make them less likely to experience crises. We employ a matching and propensity score methodology to address this issue in a panel analysis of developing countries. Our results suggest that, after controlling for sample selection bias, countries with liberalized capital accounts experience a lower likelihood of currency crises. That is, when two countries have the same likelihood of allowing free movement of capital (based on historical evidence and a very similar set of economic and political characteristics) - and one country imposes controls and the other does not - the country without controls has a lower likelihood of experiencing a currency crisis. This result is at odds with the conventional wisdom and suggests that the benefits of capital market liberalization for external stability are substantial.

Suggested Citation

Glick, Reuven and Guo, Xueyan and Hutchison, Michael M., Currency Crises, Capital Account Liberalization, and Selection Bias (June 2004). UC Santa Cruz International Economics Working Paper No. 04-14. Available at SSRN: https://ssrn.com/abstract=560142 or http://dx.doi.org/10.2139/ssrn.560142

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)

Xueyan Guo

University of California, Santa Cruz ( email )

1156 High St
Santa Cruz, CA 95064
United States

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)

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