Fear of Sudden Stops: Lessons from Australia and Chile

55 Pages Posted: 8 Jun 2004

See all articles by Ricardo J. Caballero

Ricardo J. Caballero

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

Kevin Cowan

Adolfo Ibanez University

Jonathan Kearns

Bank for International Settlements (BIS) - Monetary and Economic Department

Multiple version iconThere are 3 versions of this paper

Date Written: May 2004

Abstract

Latin American economies are exposed to substantial external vulnerability. Domestic imbalances and terms of trade shocks are often exacerbated by sudden stops of capital inflow. In this paper we explore ways of overcoming external vulnerability, drawing lessons from a detailed comparison of the response of Chile and Australia to recent external shocks and from Australia's historical experience. We argue that in order to understand sudden stops and the mechanisms to smooth them, it is useful to identify and then distinguish between two inter-related dimensions of investors' confidence: country-trust and currency-trust. Lack of country-trust is a more fundamental and serious problem behind sudden stops. But lack of currency-trust may both be a source of country-trust problems and weaken a country's ability to deal with sudden stops. We discuss steps to improve along these two dimensions of investors' confidence in the medium run, and policies to reduce the impact of country-trust and currency-trust weaknesses in the short run.

Suggested Citation

Caballero, Ricardo J. and Cowan, Kevin and Kearns, Jonathan, Fear of Sudden Stops: Lessons from Australia and Chile (May 2004). NBER Working Paper No. w10519, Available at SSRN: https://ssrn.com/abstract=552882

Ricardo J. Caballero (Contact Author)

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

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National Bureau of Economic Research (NBER)

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Kevin Cowan

Adolfo Ibanez University ( email )

Santiago
Chile

Jonathan Kearns

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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