Sudden Stops, Sectoral Reallocations, and the Real Exchange Rate

42 Pages Posted: 10 Oct 2008 Last revised: 2 Nov 2022

See all articles by Timothy J. Kehoe

Timothy J. Kehoe

University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)

Kim Ruhl

University of Minnesota - Twin Cities - Department of Economics

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Date Written: October 2008

Abstract

A sudden stop of capital flows into a developing country tends to be followed by a rapid switch from trade deficits to surpluses, a depreciation of the real exchange rate, and decreases in output and total factor productivity. Substantial reallocation takes place from the nontraded sector to the traded sector. We construct a multisector growth model, calibrate it to the Mexican economy, and use it to analyze Mexico's 1994-95 crisis. When subjected to a sudden stop, the model accounts for the trade balance reversal and the real exchange rate depreciation, but it cannot account for the decreases in GDP and TFP. Extending the model to include labor frictions and variable capital utilization, we still find that it cannot quantitatively account for the dynamics of output and productivity without losing the ability to account for the movements of other variables.

Suggested Citation

Kehoe, Timothy J. and Ruhl, Kim, Sudden Stops, Sectoral Reallocations, and the Real Exchange Rate (October 2008). NBER Working Paper No. w14395, Available at SSRN: https://ssrn.com/abstract=1281887

Timothy J. Kehoe (Contact Author)

University of Minnesota - Twin Cities - Department of Economics ( email )

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Kim Ruhl

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States

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