Working Paper: NBER ID: w10520
Authors: Guillermo A. Calvo; Alejandro Izquierdo; Luis Fernando Mejía
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.
Keywords: No keywords provided
JEL Codes: F31; F32; F34; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high domestic liability dollarization (F65) | probability of sudden stops (C69) |
| high current account deficits (F32) | probability of sudden stops (C69) |
| high domestic liability dollarization + high current account deficits (F65) | probability of sudden stops (C69) |
| current account deficits (F32) | changes in real exchange rate (F31) |
| sudden stops (F32) | disruptions in economic activity (F69) |