7 stocks of liabilities—cumulated measures of inflows into a country—that may be most relevant for developing economies as well as various measures of gross and net flows. In some of our analysis, we also look at de jure capital account openness based on an indicator of the proportion of years in which the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions indicates the absence of capital account restrictions.

For each of the threshold categories, we have to choose an appropriate measure that is conceptually sound and for which data are available for our broad sample of countries.

_a. Financial depth:_ We use the ratio of private credit to GDP as a proxy for financial depth, recognizing that this is a narrow definition of financial development. We also examine a range of alternative measures of de facto financial depth and development, such as the sum of stock market capitalization and credit to GDP, the ratio of M2 to GDP etc., as well as institutional measures such as creditors’ rights.

_b. Institutional quality:_ The World Bank Governance Indicators (WBGI) cover six aspects of institutional quality: voice and accountability; political instability and violence; government effectiveness; regulatory quality; rule of law; and control of corruption (Kaufmann et al., 2005). We use a simple average of these six indices as a proxy for aggregate institutional quality. These data are available only from 1996 and show strong persistence across time for each country; hence, we use the average of the available data as a fixed institutional variable.

_c. Regulation:_ We use an index of the rigidity of labor regulations from the International Finance Corporation’s Doing Business Database. It captures an economy’s ability to adapt to changing business conditions, including financial flows. These data are available only from 2003, so we use the average for each country as a fixed regulation variable.

_d. Trade openness:_ We use the sum of exports and imports of goods and services, expressed as a ratio to GDP. We also include a measure of policy openness to trade, defined as the proportion of years for which the trade regime is an open one (Wacziarg and Welch, 2003).

_e. Macro policies:_ The monetary and fiscal policy stances are measured by the degree of variation in consumer price inflation and the average ratio of government revenue to expenditure, respectively, over the relevant period. Whilst these macroeconomic outcomes are subject to exogenous shocks, their measurement over five-year periods can provide a broad indication of the policy stance.

_f. Overall development:_ We use the level of initial per capita GDP (either at the beginning of the sample or the initial year of each five-year period measure).

Our dataset comprises a total of 84 countries. We do not include the transition economies of Eastern Europe since their data for the pre-transition years are suspect and we need longer time series for our analysis. We also exclude small economies (population under 1 million) and a number of poor economies for which data availability, especially on capital flows, is limited. The dataset covers the period 1975-2004, giving us a maximum of six nonoverlapping five year-averaged observations for each country.

When presenting basic stylized facts, we group the countries into industrial (21), emerging market (21), and other developing countries (42) (see Appendix Table A.1). The emerging