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CSS Economics of Pakistan P-II QUESTION #1709
Question 1
The Chinn-Ito index (KAOPEN), frequently cited in cross-country empirical research on financial integration and capital mobility, is specifically designed to quantify a country's:
  • Total factor productivity in the manufacturing sector
  • Degree of capital account openness based on IMF's AREAER restrictions✔️
  • Nominal and real exchange rate volatility over a rolling period
  • None of these
Correct Answer Explanation
The Chinn-Ito index (developed by Menzie Chinn and Hiro Ito) is a de jure measure of capital account openness — it quantifies the extent to which a country restricts or liberalises cross-border capital transactions, based on binary variables derived from the IMF's Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER). A higher KAOPEN score indicates a more open capital account. Pakistan's score has historically been low, reflecting significant capital account restrictions.