Systemic Sudden Stops: The Relevance of Balance-Sheet Effects and Financial Integration

47 Pages Posted: 29 May 2008 Last revised: 30 Oct 2022

See all articles by Guillermo A. Calvo

Guillermo A. Calvo

Columbia University - School of International & Public Affairs (SIPA); National Bureau of Economic Research (NBER)

Alejandro Izquierdo

Inter-American Development Bank (IDB) - Research Department

Luis-Fernando Mejia

University of Chicago - Department of Economics

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Date Written: May 2008

Abstract

Using a sample of 110 developed and developing countries for the period 1990-2004 we analyze the empirical characteristics of systemic sudden stops (3S) in capital flows --understood as large and largely unexpected capital account contractions that occur in periods of systemic turmoil -- and the relevance of balance sheet effects in the likelihood of their materialization. We conjecture that large real exchange rate (RER) fluctuations come hand in hand with 3S. A small supply of tradable goods relative to their domestic absorption -- a proxy for potential changes in the real exchange rate -- and large foreign-exchange denominated debts towards the domestic banking system, denoted Domestic Liability Dollarization, DLD, are claimed to be key determinants of the probability of 3S, conforming a balance-sheet effect that impacts on the probability of 3S in non-linear fashion. Regarding financial integration, the larger is the latter, the larger is likely to be the probability of Sudden Stop; however, beyond a critical point the relationship gets a sign reversion.

Suggested Citation

Calvo, Guillermo A. and Izquierdo, Alejandro and Mejia, Luis-Fernando, Systemic Sudden Stops: The Relevance of Balance-Sheet Effects and Financial Integration (May 2008). NBER Working Paper No. w14026, Available at SSRN: https://ssrn.com/abstract=1137115

Guillermo A. Calvo (Contact Author)

Columbia University - School of International & Public Affairs (SIPA) ( email )

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Alejandro Izquierdo

Inter-American Development Bank (IDB) - Research Department ( email )

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Luis-Fernando Mejia

University of Chicago - Department of Economics ( email )

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