Capital Account Liberalization and Exchange Rate Regimes

Capital Account Liberalization and the Exchange Rate Regimes

Corresponding author: Associate Prof. Dr. Sule L. Aker Faculty of Business and Economics Eastern Mediterranean University Gazi Magusa, Mersin 10, Turkey [e-mail] tel: [phone] fax: [phone] Co-author: Assoc. Prof. Dr. Ahmet H. Aker Cyprus International University Nicosia, Mersin 10, Turkey

Abstract
In this study, the relationship between short-term capital flows and currency hedging, interest rates and current account is analyzed. The results show that the major determinant of short-term capital movements is the market interest rates under floating exchange rate system and liberal capital account and free trade conditions. The short-term capital flows in the sample countries are tested with respect to exchange rates (currency hedging), interest rates, and current account.

Jel Classification: F0, F3, F4, G1

Key words: Hot money, short-term capital, exchange rates, economic liberalization, developing countries.

I. INTRODUCTION Globalization envisages an international economic and financial system where all factors of production move around the world freely and easily so that the global firms meet no obstacles on their way to maximize profits. In this framework, capital account liberalization was encouraged in developing countries like Argentina, Bolivia, Ecuador, Indonesia, Malaysia, Mexico, Singapore, Turkey, Uruguay, Venezuela in late 1980`s and early 1990`s (Glick and Hutchison, 2005). Developed countries too, suspended capital controls in these two decades: UK (1979), Japan (1980), Australia and New Zealand (1983), Netherlands (1985), France, Sweden, and Denmark (1989), Belgium and Luxembourg (1990), Finland and Austria (1991), Portugal and Ireland (1993), Iceland (1994) removed restrictions on inflow of capital into the country and outflow of capital from their

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