Growth Effects of the Exchange-Rate Regime and the Capital Account Openness in a Crisis-Prone World Market: A Nuanced View

30 Pages Posted: 11 Aug 2004

See all articles by Assaf Razin

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Yona Rubinstein

Tel Aviv University - Eitan Berglas School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 2004

Abstract

It has been a remarkably difficult empirical task to identify clear-cut real effects of exchange-rate regimes on the open economy. Similarly, no definitive view emerges as to the aggregate effects of capital account liberalizations. The main hypothesis of the Paper is that a direct and an indirect effect of balance-of-payments policies, geared toward exchange-rate regimes and capital account openness, exert a confounding overall influence on output growth, in the presence of sudden-stop crises. A direct channel works through the trade and financial sectors, akin to the optimal currency area arguments. An indirect channel works through the probability of a sudden-stop crisis. The empirical analysis disentagles these conflicting effects and demonstrates that: (i) the balance-of-payments policies significantly affect the probability of crises, and the crisis probability, in turn, negatively affects output growth; (ii) controlling for the crisis probability in the growth equation, the direct effect of balance-of-payments policies is large. Domestic price crises (high inflation above a 20% threshold) affect growth only indirectly, through their positive effect on the probability of sudden-stop crises.

Keywords: Sudden stop crisis, domestic price crisis, exchange rate regime, capital account openness

JEL Classification: F10, F30

Suggested Citation

Razin, Assaf and Rubinstein, Yona, Growth Effects of the Exchange-Rate Regime and the Capital Account Openness in a Crisis-Prone World Market: A Nuanced View (July 2004). CEPR Discussion Paper No. 4475. Available at SSRN: https://ssrn.com/abstract=575003

Assaf Razin (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

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Yona Rubinstein

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 5828 (Phone)
+972 3 640 9908 (Fax)

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