Capital Account Liberalization and Economic Performance: Survey and Synthesis

This paper reviews the literature on the effects of capital account liberalization and stock market liberalization on economic growth. The various empirical measures used to gauge the presence of controls on capital account transactions as well as indicators of stock market liberalization are discussed. We compare detailed measures of capital account controls that attempt to capture the intensity of enforcement with others that simply capture whether or not controls are present. Our review of the literature shows the contrasting results that have been obtained. These differences may reflect differences in country coverage, sample periods and indicators of liberalization. In order to reconcile these differences, we present new estimates of the effects on growth of capital account liberalization and stock market liberalization. We find some support for a positive effect of capital account liberalization on growth, especially for developing countries.

Asset bubbles, domino effects and 'lifeboats': elements of the East Asian crisis

Credit market imperfections have been blamed for the depth and persistence of the Great Depression in the USA. Could similar mechanisms have played a role in ending the East Asian miracle? After a brief account of the nature of the recent crisis, we use a model of highly levered credit-constrained firms due to Kiyotaki and Moore (1997) to explore this question. As applied to land-holding property companies, it predicts greatly amplified responses to financial shocks – like the ending of the land price bubble or the fall of the exchange rate. The initial fall in asset values is followed by the ‘knock-on’ effects of the scramble for liquidity as companies sell land to satisfy their collateral requirements – causing land prices to fall further. This could lead to financial collapse where – like falling dominoes – prudent firms are brought down by imprudent firms. Key to avoiding collapse is the nature of financial stabilisation policy; in a crisis, temporary financing can prevent illiquidity becoming insolvency and launching ‘lifeboats’ can do the same. But the vulnerability of financial systems like those in East Asia to short-term foreign currency exposure suggests that preventive measures are also required

Understanding the empirical literature on purchasing power parity: the post-Bretton Woods era

Foreign exchange ; Purchasing power

A Utility Based Comparison of Some Models of Exchange Rate Volatility

When estimates of variances are used to make asset allocation decisions, underestimates of population variances lead to lower expected utility than equivalent overestimates: a utility based criterion is asymmetric, unlike standard criteria such as mean squared error. To illustrate how to estimate a utility based criterion, we use five bilateral weekly dollar exchange rates, 1973-1989, and the corresponding pair of Eurodeposit rates. Of homoskedastic, GARCH, autoregressive and nonpararnetric models for the conditional variance of each exchange rate, GARCI-J models tend to produce the highest utility, on average. A mean squared error criterion also favors GARCH, but not as sharply.

Permanent and Selective Capital Account Management Regimes as an Alternative to Self-Insurance Strategies in Emerging-Market Economies

Currency market intervention-cum-reserve accumulation has emerged as the favored selfinsurance strategy in recipient countries of excessive private capital inflows. This paper argues that capital account management represents a less costly alternative line of defense deserving renewed consideration, especially in the absence of fundamental reform of the global monetary and financial order. Mainstream arguments in favor of financial globalization are found unconvincing; any indirect benefits allegedly obtainable through hot money inflows are equally obtainable without actually tolerating such inflows. The paper investigates the experiences of Brazil, Russia, India, and China (the BRICs) in the global crisis and subsequent recovery, focusing on their respective policies regarding capital flows