Evaluation of Currency Regimes: The Unique Role of Sudden Stops

Assaf Razin () and Yona Rubinstein

No 11785, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper tackles two established puzzles in international macroeconomics literature. The first is the lack of systematic difference in the macroeconomic performance across exchange rate regimes. The second is the absence of a clear empirical relationship between macroeconomic performance and capital-account liberalization. We suggest that both may appear because empirical methodologies fail to account for a latent economic "crisis state," influenced by exchange-rate and capital account regimes, and to allow the effects of a policy regime on growth to depend on whether the economy is in a crisis-prone latent state. In practice, we model and estimate the latent state of the economy as a crisis probability. In the framework we propose, exchange rate and capital market liberalization regimes can have both a direct effect on short-term growth, and an indirect effect on growth that is channelled through their effects on the crisis probability.

JEL-codes: F3 (search for similar items in EconPapers)
Date: Written
Note: IFM
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Journal Article: Evaluation of currency regimes: the unique role of sudden stops (2006)
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