Working Paper: NBER ID: w14395
Authors: Timothy J. Kehoe; Kim J. Ruhl
Abstract: A sudden stop of capital flows into a developing country tends to be followed by a rapid switch from trade deficits to surpluses, a depreciation of the real exchange rate, and decreases in output and total factor productivity. Substantial reallocation takes place from the nontraded sector to the traded sector. We construct a multisector growth model, calibrate it to the Mexican economy, and use it to analyze Mexico's 1994-95 crisis. When subjected to a sudden stop, the model accounts for the trade balance reversal and the real exchange rate depreciation, but it cannot account for the decreases in GDP and TFP. Extending the model to include labor frictions and variable capital utilization, we still find that it cannot quantitatively account for the dynamics of output and productivity without losing the ability to account for the movements of other variables.
Keywords: sudden stops; real exchange rate; sectoral reallocations
JEL Codes: E13; F34; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sudden stop (F32) | trade balance reversal (F14) |
| sudden stop (F32) | depreciation of real exchange rate (F31) |
| sudden stop (F32) | decrease in output (E23) |
| sudden stop (F32) | decrease in TFP (D24) |
| labor frictions (J59) | decrease in output (E23) |
| variable capital utilization (G31) | decrease in output (E23) |
| labor frictions (J59) | decrease in TFP (D24) |
| variable capital utilization (G31) | decrease in TFP (D24) |