Title: Growth effects of the exchange-rate regime and the capital-account openness in a crisis-prone world market
First published: 2004
Description: "It has been a remarkably difficult empirical task to identify clear-cut real effects of exchange-rate regimes on the open economy.  Similarly, no definitive view emerges as to the aggregate effects of capital account liberalizations.  The main hypothesis of the paper is that a direct and an indirect effect of balance-of-payments policies, geared toward exchange rate regimes and capital account openness, exert a confounding overall influence on output growth, in the presence of sudden-stop crises.  A direct channel works through the trade and financial sectors, akin to the optimal currency area arguments.  An indirect channel works through the probability of a sudden-stop crisis.  The empirical analysis disentagles these conflicting effects and demonstrates that: (i) the balance-of-payments policies significantly affect the probability of crises, and the crisis probability, in turn, negatively affects output growth; (ii) controlling for the crisis probability in the growth equation, the direct effect of balance-of-payments policies is large.  Domestic price crises (high inflation above a 20 percent threshold) affect growth only indirectly; through their positive effecton the probability of sudden-stop crises"--National Bureau of Economic Research web site.
Subjects: Balance of payments, Foreign exchange
LC classification: HB1