The Impact of Capital Control on Currency Crises in Developing Countries

Capital mobility has been an important part of the economic reforms in many developing countries since the early 1990s, after realization of the benefits of decreasing capital control during 1970s. However, capital liberalization plan has caused major economic crisis in some countries making the policy makers more causios about the plan. In this study, we have used data of 70 selected developing economies over the period 1996-2005 to investigate the effect of capital control on the currency crises. Applying the probit panel data approach, the results show a significant inverse effect of capital control on currency crises in the sampling countries. Also, a higher degree of capital control is accompanied by the lower probability of currency crisis.