The Role of Capital Controls and Currency Regimes in the Asian Crisis.

While debates continue over the causes of the Asian crisis, several propositions have developed considerable currency. Two of these are that pegged exchange rates and the liberalization of capital controls played major roles in generating the crisis and its spread. A related argument frequently made is that the maintenance of highly restrictive controls helped countries such as China and India weather the storm. While rather widely held, these propositions have been subjected to relatively little systematic empirical analysis. The major purpose of this paper is to help fill this void. Our results offer several challenges to conventional wisdom. While it is undoubtedly true that China and India had restrictive controls and that they were not hit hard by the crisis, there could well be other causes for their insulation. For example, China had very high reserves and prior to the crisis, India had substantially increased the flexibility of its exchange rate regime. These issues need to be investigated within the framework of multi-variate analysis so that a number of possible influences can be taken into account. In this paper we draw upon a fundamentals based crisis model of the Asian and Mexican crises to examine the roles of exchange rate regimes and capital controls in the Asian crisis. We combine our formal statistical analysis with emphasis both on the conceptual foundations of the institutional measures used and on case study analysis of a number of the countries involved. Beyond the particular conclusion offered we hope that this analysis illustrates how case study and large N statistical analysis can complement each other. [ABSTRACT FROM AUTHOR]