On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects

48 Pages Posted: 25 Apr 2011

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 Mejía

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: July 2004

Abstract

Using a sample of 32 developed and developing countries we analyze the empirical characteristics of Sudden Stops in capital flows and the relevance of balance-sheet effects in the likelihood of their occurrence. We find that large real exchange rate (RER) fluctuations accompanied by Sudden Stops are basically an emerging market (EM) phenomenon. Sudden Stops seem to come in bunches, grouping together countries that are different in many respects. However, countries are similar in that they remain vulnerable to large RER fluctuations. This may be the case because countries are forced to make large adjustments in the absorption of tradable goods, and/or because the size of dollar liabilities in the banking system (i. e. , domestic liability dollarization, or DLD) is large. Openness, understood as a large supply of tradable goods that reduces leverage over the current account deficit, in combination with DLD, is a key determinant of the probability of Sudden Stops. The relationship between Openness and DLD in the determination of the probability of Sudden Stops is highly non-linear, implying that the interaction of high current account leverage and high dollarization may be a dangerous cocktail.

Suggested Citation

Calvo, Guillermo A. and Izquierdo, Alejandro and Mejía, Luis Fernando, On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects (July 2004). IDB Working Paper No. 422, Available at SSRN: https://ssrn.com/abstract=1818711 or http://dx.doi.org/10.2139/ssrn.1818711

Guillermo A. Calvo (Contact Author)

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

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National Bureau of Economic Research (NBER) ( email )

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Alejandro Izquierdo

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

1300 New York Ave., NW
Washington, DC 20577
United States

Luis Fernando Mejía

affiliation not provided to SSRN

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