In Search of Lost Time: Examining the Duration of Sudden Stops in Capital Flows

34 Pages Posted: 3 Dec 2019

See all articles by Antonio C. David

Antonio C. David

World Bank - Policy Research Department; International Monetary Fund (IMF)

Carlos Goncalves

International Monetary Fund (IMF)

Date Written: November 2019

Abstract

This paper investigates what factors affect the duration of sudden stops in capital flows using quarterly data for a large panel of countries. We find that countries with floating exchange rate regimes tend to experience shorter sudden stop episodes and that fixed exchange rate regimes are associated with longer periods of low output growth following sudden stops. These effects are quantitatively large: having a flexible exchange rate regime increases the probability of exiting the sudden stop state by between 50 to 80 percent. Flexible exchange rate regimes significantly shorten the duration of output decelerations following sudden stops by over 30 percent. Positive variations in terms of trade also abbreviate the duration of sudden stops. In terms of policies, identification is trickier, but the evidence suggests that monetary policy tightening shortens the duration of sudden stops. Changes in capital account restrictions do not seem to matter.

Keywords: Balance of payments statistics, Private capital flows, Sudden stops, Real interest rates, Interest rate increases, Capital Flows, Duration Analysis., WP, sudden stop, exchange rate regime, Weibull, policy response, deceleration

JEL Classification: F21, F32, F41, E01, F3, O24, G21, C

Suggested Citation

David, Antonio C. and Goncalves, Carlos, In Search of Lost Time: Examining the Duration of Sudden Stops in Capital Flows (November 2019). IMF Working Paper No. 19/230. Available at SSRN: https://ssrn.com/abstract=3496708

Antonio C. David (Contact Author)

World Bank - Policy Research Department ( email )

1818 H Street
Washington, DC 20433
United States

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

Carlos Goncalves

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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