Nber Working Paper Series Sequencing of Reforms, Financial Globalization, and Macroeconomic Vulnerability

I use a large cross country data set and panel probit analysis to investigate the way in which the interaction between trade and financial openness affect the probability of external crises. This analysis is related to debate on the adequate sequencing of reform. I also investigate the role played by current account and fiscal imbalances, contagion, international reserves holdings, and the exchange rate regime as possible determinants of external crises. The results indicate that relaxing capital controls increases the likelihood of a country experiencing a sudden stop. Moreover, the results suggest that “financial liberalization first” strategies increase the degree of vulnerability to external crises. This is particularly the case if this strategy is pursued with pegged exchange rates and if it results in large current account imbalances. Sebastian Edwards UCLA Anderson Graduate School of Business 110 Westwood Plaza, Suite C508 Box 951481 Los Angeles, CA 90095-1481 and NBER [email protected]