NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Capital Controls, Sudden Stops and Current Account Reversals

Sebastian Edwards

NBER Working Paper No. 11170
Issued in March 2005
NBER Program(s):   IFM

In this paper I use a broad multi-country data set to analyze the relationship between restrictions to capital mobility and external crises. The analysis focuses on two manifestations of external crises: (a) sudden stops of capital inflows; and (b) current account reversals. I deal with two important policy-related issues: First, does the extent of capital mobility affect countries' degree of vulnerability to external crises; and second, does the extent of capital mobility determine the depth of external crises -- as measured by the decline in growth -- once the crises occur? Overall, my results cast some doubts on the assertion that increased capital mobility has caused heightened macroeconomic vulnerabilities. I find no systematic evidence suggesting that countries with higher capital mobility tend to have a higher incidence of crises, or tend to face a higher probability of having a crisis, than countries with lower mobility. My results do suggest, however, that once a crisis occurs, countries with higher capital mobility may face a higher cost, in terms of growth decline.

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Document Object Identifier (DOI): 10.3386/w11170

Published: Capital Controls, Sudden Stops, and Current Account Reversals, Sebastian Edwards. in Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, Edwards. 2007

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