On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects
51 Pages Posted: 15 Jun 2004 Last revised: 1 Oct 2022
There are 2 versions of this paper
On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects
On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects
Date Written: May 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 materialization. We find that large real exchange rate (RER) fluctuations coming hand in hand with 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 - be it because they could be forced to 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 high. Openness, understood as a large supply of tradable goods that reduces leverage over the current account deficit, coupled with DLD, are key determinants 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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
International and Domestic Collateral Constraints in a Model of Emerging Market Crises
-
International and Domestic Collateral Constraints in a Model of Emerging Market Crises
-
Currency Crises and Monetary Policy in an Economy with Credit Constraints
By Philippe Aghion, Abhijit V. Banerjee, ...
-
On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects
By Guillermo A. Calvo, Alejandro Izquierdo, ...
-
Current Account Reversals and Currency Crises: Empirical Regularities
-
Balance Sheets and Exchange Rate Policy
By Luis Felipe Cespedes, Roberto Chang, ...
-
Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons
By Guillermo A. Calvo, Alejandro Izquierdo, ...
-
Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons
By Alejandro Izquierdo, Ernesto Talvi, ...
-
Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops
-
Excessive Dollar Debt: Financial Development and Underinsurance