Abstract

http://ssrn.com/abstract=1108710
 
 

References (29)



 
 

Citations (22)



 


 



A Global Equilibrium Model of Sudden Stops and External Liquidity Management


Ricardo J. Caballero


Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Stavros Panageas


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

September 7, 2007

MIT Department of Economics Working Paper No. 08-05

Abstract:     
Emerging market economies, which have much of their growth ahead of them, either run or should run persistent current account deficits in order to smooth consumption intertemporally. The counterpart of these deficits is their dependence on capital inflows, which can suddenly stop. We make two contributions in this paper: First, we develop a quantitative global-equilibrium model of sudden stops. Second, we use this structure to discuss practical mechanisms to insure emerging markets against sudden stops, ranging from conventional non-contingent reserves accumulation to more sophisticated contingent instrument strategies. Depending on the source of sudden stops, their correlation with world events, and the quality of the hedging instrument available, the gains from these strategies can represent a substantial improvement over existing practices.

Number of Pages in PDF File: 54

Keywords: Capital flows, sudden stops, reserves, international liquidity management, world, capital markets, swaps, insurance, hedging, options, hidden states, Bayesian methods

JEL Classification: E2, E3, F3, F4, G0, C1

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Date posted: March 20, 2008  

Suggested Citation

Caballero, Ricardo J. and Panageas, Stavros, A Global Equilibrium Model of Sudden Stops and External Liquidity Management (September 7, 2007). MIT Department of Economics Working Paper No. 08-05. Available at SSRN: http://ssrn.com/abstract=1108710 or http://dx.doi.org/10.2139/ssrn.1108710

Contact Information

Ricardo J. Caballero (Contact Author)
Massachusetts Institute of Technology (MIT) - Department of Economics ( email )
50 Memorial Drive
E52-252A
Cambridge, MA 02142
United States
617-253-0489 (Phone)
617-253-1330 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Stavros Panageas
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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