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The resulting index and its subcomponents are the most comprehensive and detailed indices of capital controls currently available. Compared with broad binary dummies, the new indices provide a more precise measure of controls, and permit analysis of various types of controls.

Reaping the Benefits of Financial Globalization

This said, like all AREAER -based measures, the index cannot reflect differences in enforcement or economic relevance of controls across countries. For the purposes of this paper, the focus is on a subset of these categories, namely, equity, money market, bond, collective investment and direct investment. These categories broadly correspond to the standard decomposition of de facto financial flows. Restrictions on capital transactions are coded as a 0 not restricted if they consist merely of registration or notification requirements.

They are also coded as 0 if a country is generally open but imposes restrictions on investments in a small number of selected industries, for example, for national security purposes, or if it is generally open but excludes a small number of countries, typically for political reasons.

IMF Survey: Putting Financial Globalization to Work

Using a binary index at this level facilitates consistency in coding across countries and years, though it requires abstracting from differences in the form of controls prohibition, limitation, taxation, or registration requirements. Schindler provides additional detail on the data construction and makes the dataset publicly available. U sing a variety of case studies on countries' experiences with financial account liberalization, it is possible to illustrate some of the findings reported in Section VI.

Countries' experiences are grouped along two dimensions: As shown below, the overall picture that emerges is that countries with relatively sound macroeconomic policies and well-developed domestic financial systems are less likely to face crisis than countries without these characteristics. While the predicted pattern holds on average, a few countries experienced crises despite faring relatively well with respect to sound policies and domestic financial development, and some countries with policy and institutional shortcomings nevertheless avoided crises. As shown in the case studies, for the sample of countries covered, whether the pace of liberalization is fast, gradual, or slow does not appear to have a significant impact on the likelihood of crisis.

On the whole, crisis propensity seems primarily related to whether financial account liberalization is part of a broader package aimed at the development and appropriate regulation of the domestic financial sector and sound macroeconomic policies including external imbalances that are not excessive. Countries that liberalized their financial account while suffering from weaknesses in the financial sector, in particular in the banking sector—as was the case for a number of countries affected by the Asian crisis—seem to be more likely to suffer crisis than countries that improved prudential policies before liberalizing the financial account.

Countries with increasing current account deficits, rising inflation, and expansionary fiscal policies also seem more likely to suffer a currency or debt crisis when compared with countries with low current account deficits, low inflation, and solid public finances. The country coverage in this appendix differs from that underlying Table 6. Nevertheless, the broad pattern of results is consistent across the two samples.

London School of Economics. Artis , Michael J. Centre for Economic Policy Research. Bekaert , Geert , Campbell R. Berg , Andrew , Jonathan D. Bordo , Michael , and Christopher M. Calvo , Guillermo A. National Bureau of Economic Research. Desai , Mihir , C. Fritz Foley , and James R. University of Chicago Press. Ghosh , Atish R.

Henry , Peter B. International Monetary Fund, various issues. Johnson , Simon , Jonathan D.


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Governance Indicators for — Ayhan , Eswar S. Prasad , and Marco E. Lane , Philip R. Also forthcoming in the Journal of International Economics. Lucas , Robert E. Mishkin , Frederic S.

IMF Survey: Putting Financial Globalization to Work

Moran , Theodore H. Institute for International Economics. What Have We Learned? Obstfeld , Maurice , and Alan M. Taylor , Global Capital Markets: Constituencies and Competitive Rent Preservation unpublished; Chicago: University of Chicago Graduate School of Business.


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    Although, in principle, financial globalization should enhance international risk sharing, reduce macroeconomic volatility, and foster economic growth, in practice its effects are less clear-cut. This paper envisages a gradual and orderly sequencing of external financial liberalization and complementary reforms in macroeconomic policy framework as essential components of a successful liberalization strategy.

    Country coverage in the different exercises in the paper depends on data availability.

    Keynote lecture: Trilemmas and tradeoffs: Living with financial globalization

    Appendix III Case Studies on Financial Account Liberalization U sing a variety of case studies on countries' experiences with financial account liberalization, it is possible to illustrate some of the findings reported in Section VI. No currency or debt crisis after liberalization Austria —91 Gradual. Long-term flows liberalized before short-term flows. Sound and well-supervised financial sector. Chile —98 Gradual and selective. Liberalization of longer-term inflows and outflows, with selective capital controls on inflows that were later broadened because of circumvention.

    Focused initially on liberalizing inflows, though with strong restrictions on liquidation of FDI and repatriation of profits. Capital outflows gradually liberalized. Introduction of market-based capital controls URR on new foreign borrowing except trade credits and foreign currency deposits to limit short-term credit inflows. Restructuring of banking system: Central bank becomes independent and in charge of stability of financial system. Development of the stock exchange, money and exchange markets, and local security markets.

    Modification of exchange rate regime to allow for greater flexibility of the rate within a crawling band exchange arrangement to ensure orderly real appreciation of the currency. Restrictive monetary policy conducing to a reduction of inflation from more than 25 percent to 4 percent a year. Czech Republic Fast. With the exception of some outflows, almost all controls removed by the end of Inflows liberalized before outflows.

    Outflows by nonresidents fully liberalized in Five-year program to eliminate controls in outflows in the context of accession to OECD Fixed exchange rate regime. Estonia Fast Almost all controls removed by Pension funds' investments last to be liberalized. Controls on FDI first to be eased. Last flows to be fully liberalized concerned bank lending in local currency to nonresidents and residents' ownership of foreign exchange accounts. All controls abolished by January 1, Major deregulation of financial sector in stages, with abolishment of quantitative credit controls.

    Reduction of current account deficit. Rapid financial sector reforms. Foreign bank participation encouraged early. Macroeconomic stabilization following crisis. Real estate and pension funds' investments last to be liberalized. Slovak Republic — Gradual. Long-term flows liberalized before short-term flows; inflows before outflows; FDI and portfolio before financial credits.

    Most restrictions eliminated to meet EU requirements. OECD accession was also an important anchor. After having introduced capital controls in , credit operations liberalized first. Portfolio flows last to be liberalized. Spain —93 Gradual with occasional reversals. Controls on inflows abolished in February and temporarily reintroduced in during the EMS crisis. Liberalization in the context of admittance to the then EEC. Step-by-step approach effectively started in FDI inflows and resident-export-related transactions liberalized first.

    Many restrictions on inward portfolio investment and outward non-export-related capital transactions remain. In , Tunisia signed an association agreement with the EU that implied the goal of full trade liberalization and capital account convertibility. Banking sector restructuring early s , though still fragile.

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    Trade gradually liberalized reduction of quantity restrictions on imports. Adopted full currency convertibility Is Fiscal Policy "Responsible"? Evidence from firm-level credit ratings data ," Journal of International Money and Finance , Elsevier, vol. Determinants and Analysis ," World Development , Elsevier, vol. A new assessment ," Journal of International Economics , Elsevier, vol. Legal restrictions and the asset composition of international financial flows ," Journal of International Money and Finance , Elsevier, vol.

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