Working Paper: NBER ID: w11133
Authors: V. V. Chari; Patrick J. Kehoe; Ellen R. McGrattan
Abstract: In recent financial crises and in recent theoretical studies of them, abrupt declines in capital inflows, or sudden stops, have been linked with large drops in output. Do sudden stops cause output drops? No, according to a standard equilibrium model in which sudden stops are generated by an abrupt tightening of a country's collateral constraint on foreign borrowing. In this model, in fact, sudden stops lead to output increases, not decreases. An examination of the quantitative effects of a well-known sudden stop, in Mexico in the mid-1990s, confirms that a drop in output accompanying a sudden stop cannot be accounted for by the sudden stop alone. To generate an output drop during a financial crisis, as other studies have done, the model must include other economic frictions which have negative effects on output large enough to overwhelm the positive effect of the sudden stop.
Keywords: No keywords provided
JEL Codes: F4; F41; E3; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sudden stops (F32) | output increases (E23) |
| sudden stops (F32) | output drops (Y10) |
| sudden stops + economic frictions (F32) | output drops (Y10) |
| economic frictions + sudden stops (F32) | output drops (Y10) |