Sequencing of Reforms, Financial Globalization, and Macroeconomic Vulnerability

Sebastian Edwards ()

No 14384, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F30 F31 F32 F4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-lam
Date: 2008-10
Note: IFM
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