DP2724 How Risky is Financial Liberalization in the Developing Countries?

Author(s): Charles Wyplosz
Publication Date: March 2001
Keyword(s): Currency Crises, Liberalization, Sequencing
JEL(s): E40, F30, F40, G20, O10
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2724

This Paper looks at the effect of domestic and external financial liberalization. Using a sample of 27 developing and developed countries, it studies the exchange market pressure and output gap effects of liberalization. The results show that developing and developed countries differ in many respects. By and large, the effects are significantly stronger in developing countries. Exchange market pressure to be strongly positive as capital flows, but reversals seem to follow systematically. Similarly, the behaviour of the output gap corresponds well to boom and bust cycles. The Paper concludes with a discussion of policy measures desirable to make liberalization safer than it has been so far.