Relative Price Volatility Under Sudden Stops: The Relevance of Balance Sheet Effects
43 Pages Posted: 29 Aug 2005 Last revised: 28 May 2021
Date Written: July 2005
Sudden Stops are associated with increased volatility in relative prices. We introduce a model based on information acquisition to rationalize this increased volatility. An empirical analysis of the conditional variance of the wholesale price to consumer price ratio using panel ARCH techniques confirms the relevance of Sudden Stops and potential balance-sheet effects as key determinants of relative-price volatility, where balance-sheet effects are captured by the interaction of a proxy for potential changes in the real exchange rate (linked to the degree of external leverage of the absorption of tradable goods) and a measure of domestic liability dollarization.
Suggested Citation: Suggested Citation