Working Paper: NBER ID: w12726
Authors: Alexander D. Rothenberg; Francis E. Warnock
Abstract: We extend the sudden stops literature by allowing crisis episodes to be caused by either the retreat of global investors, as is assumed but not shown in the extant literature, or the sudden flight of local investors. We find that almost half of the previously defined sudden stops are actually episodes of sudden flight. Compared to sudden flight, true sudden stops are bunched and are associated with greater slowdowns in economic activity and sharper currency depreciations. We show that the empirical regularities of sudden flight and true sudden stops are consistent with theoretical models that incorporate gross capital flows and information asymmetries.
Keywords: sudden stops; capital flight; emerging markets; economic activity; currency depreciation
JEL Codes: F32; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sudden flight episodes (Y60) | local investors exiting the market (G14) |
| sudden stops (F32) | local investors exiting the market (G14) |
| sudden stops (F32) | pronounced slowdowns in GDP (F69) |
| sudden stops (F32) | sharper currency depreciations (F31) |
| sudden flight episodes (Y60) | temporary slowdowns followed by strong inflows (F32) |
| true sudden stops (C69) | bunched in time (contagion effect) (C92) |
| sudden flight episodes (Y60) | more dispersed (D39) |