Assessing the Causes of Capital Account Liberalization: How Measurement Matters

Why do countries open their economies to global capital markets? A number of recent articles have found that two types of factors encourage politicians to liberalize their capital accounts: strong macroeconomic fundamentals and political pressure from proponents of open capital markets. However, these conclusions need to be re-evaluated because the most commonly used measure of capital account openness, Chinn and Ito's (2002) Kaopen index, suffers from systematic measurement error. We modify the Chinn–Ito variable and replicate two studies (Brooks and Kurtz 2007; Chwieroth 2007) to demonstrate that our improved measure overturns some prior findings. Some political variables have stronger effects on capital account policy than previously recognized, while macroeconomic fundamentals are less important than previous research suggests.