On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects

51 Pages Posted: 15 Jun 2004

See all articles by Guillermo A. Calvo

Guillermo A. Calvo

Columbia University - School of International & Public Affairs (SIPA); National Bureau of Economic Research (NBER)

Alejandro Izquierdo

Inter-American Development Bank (IDB) - Research Department

Luis-Fernando Mejia

University of Chicago - Department of Economics

Multiple version iconThere are 2 versions of this paper

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

Calvo, Guillermo A. and Izquierdo, Alejandro and Mejia, Luis-Fernando, On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects (May 2004). NBER Working Paper No. w10520, Available at SSRN: https://ssrn.com/abstract=552883

Guillermo A. Calvo (Contact Author)

Columbia University - School of International & Public Affairs (SIPA) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Alejandro Izquierdo

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

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United States

Luis-Fernando Mejia

University of Chicago - Department of Economics ( email )

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Chicago, IL 60637
United States

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