Capital account liberalization, currency crisis, and financial depth

Abstract

The effect of capital account openness to economic growth has long been the topic for discussion by scholars, and based on empirical studies, there are threshold effect. For countries which over the threshold, the possibility of economic growth after financial openness will increase while the likelihood of suffering from financial crisis after open to international capital flow will decrease. Whereas countries under the threshold will suffer from volatility rather than enjoy growth. This paper is intended to conduct an empirical study to test how the threshold effect will influence the possibility of currency crisis on the process of capital account liberalization. Based on the study, a higher possibility of currency crisis can be found in countries with less developed financial markets and open capital account. A progressive approach to open capital account for less developed countries have been suggested.