College of Behavioral & Social Sciences

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    When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options
    (1999-06-29) Calvo, Guillermo A.; Reinhart, Carmen M.
    In this paper we present evidence that capital account reversals have become more severe for emerging markets. Because policy options are limited in the midst of a capital market crisis and because so many countries have already had crises recently, we focus on some of the policies that could reduce the incidence of crises in the first place, or at least make the sudden stop problem less severe. In this regard, we consider the relative merits of capital controls and dollarization. We conclude that, while the evidence suggests that capital controls appear to influence the composition of flows skewing flows away from short maturities, such policies are not likely to be a long-run solution to the recurring problem of sudden capital flow reversals. Yet, because fear of floating, many emerging markets are likely to turn to increased reliance on controls. Dollarization would appear to have the edge as a more marketoriented option to ameliorate, if not eliminate, the sudden stop problem.
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    Essays on Multiple Exchange Rate Systems
    (2005-09-21) Avellan, Leopoldo Martin; Reinhart, Carmen M; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
    This dissertation measures the impact of multiple exchange rate systems on economic performance and on net capital flows in developing countries. The literature on the effectiveness of capital controls has some problems. Two of them are that it often ignores the endogeneity of capital controls, and that most of the evidence is dominated by some country specific studies. This dissertation fills this gap. It uses a multicountry panel to quantify the effects of parallel rates in the economy, but in doing so it explicitly models the endogeneity of multiple exchange rates. The dissertation is structured as follows. Chapter 1 evaluates the relationship between parallel exchange rates and economic performance in the post Bretton Woods period (1974-2001). The main findings are not only that parallel exchange rates are more likely to be adopted when economic performance is bad, but also that they hurt economic performance, indicating the existence of a negative feedback mechanism linking economic performance and parallel markets. It also finds that liability dollarization and high debt service are possible determinants of the likelihood to segment the foreign exchange market. Chapter 2 evaluates the effectiveness of multiple exchange rates systems as a policy tool to stop capital outflows. Controlling for push and pull factors that drive capital flows, and using data from 46 developing countries for the 1980-2001 period, it cannot find empirical support for the claim that segmenting the foreign exchange market stops capital outflows. The evidence suggests that multiple exchange rates systems do not have any effect on capital outflows, at best. At worst, the evidence suggests that parallel exchange rate systems increase capital outflows rather than discouraging them. This last result can be rationalized with a policy signaling model for capital controls.