Abstract

http://ssrn.com/abstract=414580
 
 

References (28)



 
 

Citations (9)



 


 



Hedging Sudden Stops & Precautionary Contractions


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)

May 26, 2003

MIT Department of Economics Working Paper No. 03-19

Abstract:     
Even well managed emerging market economies are exposed to significant external risk, the bulk of which is financial. At a moment's notice, these economies may be required to reverse the capital inflows that have supported the preceding boom. While capital flows crises are sudden nonlinear events (sudden stops), their likelihood fluctuates over time. The question we address in the paper is: how should a country react to these fluctuations. Depending on the hedging possibilities the country faces, the options range from pure self-insurance to hedging the sudden stop jump itself. In between, there is the more likely possibility to hedge the smoother fluctuations in the likelihood of sudden stops. The main contribution of the paper is to provide an analytically and empirically tractable model that allows us to characterize and quantify optimal contingent liability management in a variety of scenarios. We show, with a concrete example, that the gains from contingent liability management can easily exceed the equivalent of cutting a country's external liabilities by 10 percent of GDP.

Number of Pages in PDF File: 59

Keywords: Capital flows, sudden stops, financial constraints, contractions, hedging, insurance, signals

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

working papers series





Download This Paper

Date posted: June 9, 2003  

Suggested Citation

Caballero, Ricardo J. and Panageas, Stavros, Hedging Sudden Stops & Precautionary Contractions (May 26, 2003). MIT Department of Economics Working Paper No. 03-19. Available at SSRN: http://ssrn.com/abstract=414580 or http://dx.doi.org/10.2139/ssrn.414580

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
Feedback to SSRN


Paper statistics
Abstract Views: 1,200
Downloads: 137
Download Rank: 126,066
References:  28
Citations:  9

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo1 in 0.375 seconds