The empirical relationship between capital controls and the financial development of credit and equity markets is examined. We extend the literature on this subject along a number of , we (1) investigate a substantially broader set of proxy measures of financial development; (2) create and utilize a new index based on the IMF measures of exchange restrictions that incorporates a measure of the intensity of capital controls; and (3) extend the previous literature by systematically examining the implications of institutional (legal) factors. The results suggest that the rate of financial development, as measured by private credit creation and stock market activity,. | NBER WORKING PAPER SERIES CAPITAL ACCOUNT LIBERALIZATION INSTITUTIONS AND FINANCIAL DEVELOPMENT CROSS COUNTRY EVIDENCE Menzie D. Chinn Hiro Ito Working Paper 8967 http papers w8967 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge MA 02138 June 2002 Helpful comments were received from Joshua Aizenman Michael Hutchison Carl Walsh Frank Warnock participants at the UCSC brown bag the USC development seminar and on an earlier version of the paper the ANU-IMF East Asia Office conference on Regional Financial Markets Sydney November 2001 . We also thank Ashok Mody and Dennis Quinn for providing data. Financial support of faculty research funds of UC Santa Cruz are gratefully acknowledged. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research. 2002 by Menzie D. Chinn and Hiro Ito. All rights reserved. Short sections of text not to exceed two paragraphs may be quoted without explicit permission provided that full credit including notice is given to the source. Capital Account Liberalization Institutions and Financial Development Cross Country Evidence Menzie D. Chinn and Hiro Ito NBER Working Paper No. 8967 June 2002 JEL No. F36 F43 G28 ABSTRACT The empirical relationship between capital controls and the financial development of credit and equity markets is examined. We extend the literature on this subject along a number of dimensions. Specifically we 1 investigate a substantially broader set of proxy measures of financial development 2 create and utilize a new index based on the IMF measures of exchange restrictions that incorporates a measure of the intensity of capital controls and 3 extend the previous literature by systematically examining the implications of institutional legal factors. The results suggest that the rate of financial development as measured by private credit creation and stock market activity is linked to the existence of capital controls. However
