Working Paper: NBER ID: w12393
Authors: Michael D. Bordo
Abstract: The current pattern of sudden stops and financial crises in emerging markets has great resonance to events in the first era of globalization, from 1870-1913. In this paper I present descriptive statistics on capital flows, current account reversals and financial crises during the period 1870-1913 and compare them with the recent experience. I analyze the incidence of crises and measure their effects on real output losses. Furthermore, I consider the influence of openness to trade, original sin and currency mismatches on the pattern of sudden stops and financial crises. I find strikingly similar patterns across both eras of globalization. The pre-1914 sudden stops were associated with significant output losses comparable with the recent events, and their effects differed considerably depending on a country's economic circumstances, just as they do today.
Keywords: sudden stops; financial crises; original sin; emerging markets; capital flows
JEL Codes: E44; F32; N1; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sudden stops (F32) | significant output losses (E23) |
| original sin (Y60) | severity of output losses during sudden stops (E44) |
| currency mismatches (F31) | severity of output losses during sudden stops (E44) |
| high levels of liability dollarization (F65) | greater risks of financial crises during sudden stops (F65) |
| depreciation of local currencies (F31) | increase in value of foreign-denominated liabilities relative to local assets (F31) |
| openness to trade (F10) | incidence of financial crises (G01) |
| robustness of institutions (O17) | economic resilience (R23) |
| sound fiscal and monetary policies (E63) | withstand external shocks (F41) |