Working Paper

Capital account liberalization and disinflation in the 1990s

Abstract: This paper addresses the potential link between two relatively surprising international economic trends of the 1990s. The first is global disinflation. Why did inflation fall so quickly, even in countries with long histories of high inflation? Latin America?s average inflation rate, for example, fell from over 400% in 1990 to under 10% in 1999. A second puzzle is why so many countries opened their capital accounts in the 1990s, despite warnings regarding the risk of currency and banking crises. Are these two developments related? Does capital account liberalization facilitate disinflation by raising the penalties for excess money creation? David Romer (1993) explores a similar hypothesis for openness to trade. But whereas trade shares evolve slowly, even a landlocked country can liberalize its capital account more or less overnight. Did countries that opened their capital accounts in the 1990s find it easier to disinflate, and why? These are the key questions addressed in this paper.

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2001-02-01

Number: 0104