Capital Controls, Sudden Stops, and Current Account Reversals

Abstract

Abstract This chapter uses a broad multicountry data set to examine the link between restrictions on capital mobility and currency crises. A country's degree of trade openness is an important determinant of the growth costs of current account reversals. It is noted that higher capital mobility has not been linked with a higher occurrence of banking crises; banking crises have occurred at the same rate in countries with High, Intermediate, and Low capital mobility. There is no clear evidence confirming the view that Low capital mobility countries have a significantly lower incidence of sudden stops or current account reversals. Once a reversal has taken place, countries with a higher degree of capital mobility will experience a deeper drop in growth. The results cast some doubts on the assertion that increased capital mobility has caused heightened macroeconomic vulnerabilities.