Relative Price Volatility Under Sudden Stops: The Relevance of Balance Sheet Effects

43 Pages Posted: 29 Aug 2005 Last revised: 28 May 2021

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

Rudy J. Loo-Kung

Inter-American Development Bank (IADB)

Date Written: July 2005

Abstract

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

Calvo, Guillermo A. and Izquierdo, Alejandro and Loo-Kung, Rudy J., Relative Price Volatility Under Sudden Stops: The Relevance of Balance Sheet Effects (July 2005). NBER Working Paper No. w11492, Available at SSRN: https://ssrn.com/abstract=767384

Guillermo A. Calvo (Contact Author)

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

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New York, NY 10027
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National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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Alejandro Izquierdo

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

1300 New York Ave., NW
Washington, DC 20577
United States

Rudy J. Loo-Kung

Inter-American Development Bank (IADB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

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