Smoothing Sudden Stops

26 Pages Posted: 25 Jul 2001

See all articles by Ricardo J. Caballero

Ricardo J. Caballero

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

Arvind Krishnamurthy

Northwestern University - Kellogg School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: July 5, 2001


Emerging economies are exposed to severe and sudden shortages of international financial resources. Yet domestic agents seem not to undertake enough precautions against these sudden stops. Following our previous work, we highlight in this paper the central role played by limited domestic development in ex-ante (insurance) and ex-post (spot) financial markets in generating this collective undervaluation of external resources and insurance. Within this structure, this paper studies several canonical policies to counteract the external underinsurance. We do this by first solving for the optimal mechanism given the constraints imposed by limited domestic financial development, and then considering the main - in terms of the model and practical relevance - implementations of this mechanism.

Keywords: External Shocks, domestic and international collateral, underinsurance, credit lines, liquidity requirements, asset market intervention

JEL Classification: E0, E4, E5, F0, F3, F4, G1

Suggested Citation

Caballero, Ricardo J. and Krishnamurthy, Arvind, Smoothing Sudden Stops (July 5, 2001). MIT Dept. of Economics Working Paper No. 01-26. Available at SSRN: or

Ricardo J. Caballero (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Arvind Krishnamurthy

Northwestern University - Kellogg School of Management ( email )

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