Currency crisis, capital flow regulations, and political performance: assessing high and middle-income economies

This study examines how the effectiveness of capital control regulations and political performance shape the likelihood of currency crises in high- and middle-income economies. Using panel data for 48 countries from 1996 to 2023 and estimating probit, logit, and IV-probit models, the analysis identifies a strong interaction among currency crisis, political performance and capital regulation. In middle-income countries, stronger political stability enhances the effectiveness of capital controls, reducing vulnerability to currency crises by moderating capital outflows. Politically stable governments tend to attract more capital inflows, while politically fragile governments face lower crisis risk when capital movements are tightly restricted. In high-income economies, capital openness combined with political stability is associated with fewer currency crisis. Conversely, middle-income economies benefit more from capital controls, particularly under political fragility. However, greater transparency in politically unstable middle-income countries increases crisis risk. These findings suggest that policymakers should carefully adjust capital controls during periods of political instability and heightened capital openness.