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Tel-Aviv UniversityGrowth Effects of Exchange Rate Regimes and Capital Account Liberalization in the Presence of Crises: A Nuanced View

By Guillermo A. Calvo, Assaf Razin and Yona RubinsteinAssaf Razin and Yona Rubinstein


Empirical growth equations are typically explained by (i) the history of the exchange rate regimes, (ii) capital market liberalization regimes, and (iii) actual balance of payments crises. The literature on the effects of policy switches on growth typically ignores the effect of policy on the likelihood of crises, and, in turn, the effect of crises on growth. It ignored a key explanatory variable, the probabilty of crisis, which is determined also by policy. Balance-of-payments policies affect growth both directly, and indirectly, through their effect on the probability of a crisis. The direct and indirect effects, however, typically work through the economic system in different directions. In this paper, therefore, we develop an economteric approach aimed at evaluating balance-of-payments policy by incorporating both the direct and indirect channels. Using sample of 100 countries over the period 1970 to 1998, we estimate the effects of balance-of-payments policy on growth. We find that: (i) While policy switches do affect the crisis probability

Year: 2004
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