Domestic Antidotes to Sudden Stops

43 Pages Posted: 17 Jan 2018

See all articles by Eduardo A. Cavallo

Eduardo A. Cavallo

Inter-American Development Bank (IDB) - Research Department

Alejandro Izquierdo

Inter-American Development Bank (IDB) - Research Department

John Leon-Diaz

Inter-American Development Bank (IDB) - Research Department

Date Written: November 2017

Abstract

Sudden Stops in net capital flows can be prevented when the actions of domestic investors offset a reduction in foreign lending. This paper presents evidence that while sudden stops in gross inflows—i.e., a tightening of the external borrowing constraint—are associated with global conditions and therefore, are largely outside of the control of local policymakers, domestic factors such as low levels of liability dollarization, exchange rate flexibility, inflation targeting regimes, and a solid institutional background are important to prevent these episodes from becoming sudden stops in net capital flows. Under these favorable local conditions, domestic investors may perceive reduced risk in bringing in resources at the time of an external shock, thus insulating the country from this shock.

Keywords: : Gross capital flows, Sudden stops, Retrenchments, Domestic versus foreign investors

JEL Classification: F30, F32, F40

Suggested Citation

Cavallo, Eduardo A. and Izquierdo, Alejandro and Leon-Diaz, John, Domestic Antidotes to Sudden Stops (November 2017). IDB Working Paper No. IDB-WP-851, Available at SSRN: https://ssrn.com/abstract=3103801 or http://dx.doi.org/10.2139/ssrn.3103801

Eduardo A. Cavallo (Contact Author)

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

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

Alejandro Izquierdo

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

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

John Leon-Diaz

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

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

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