Do Currency Crises Cause Capital Account Liberalization?


  • Thanks to David Leblang and Kevin Morrison for insightful comments on an earlier draft and to Andrew Berg, Menzie Chinn, Hiro Ito, Ashoka Mody, Catherine Pattillo, and Dennis Quinn for sharing their data. All errors are my own. Replication data and code are available from the author at


Pepinsky, Thomas B. (2012) Do Currency Crises Cause Capital Account Liberalization? International Studies Quarterly, doi: 10.1111/j.1468-2478.2012.00729.x
© 2012 International Studies Association

A central argument in the literature on economic crises and policy reform is that currency crises lead governments to liberalize their capital accounts in order to establish their credibility to international markets. I argue that the reverse is true: currency crises lead governments to restrict capital flows as a form of self-help. Using instrumental variables to account for the possibility that capital account liberalization causes currency crises, I show that currency crises are robustly associated with capital account closure across developing countries. The findings refocus the debate on currency crises and capital account liberalization and contribute to larger debates about the role of critical junctures in prompting neoliberal policy reform.