Financial crashes were followed by deep recessions in the sudden stops of emerging economies. The waves of sudden stops that followed began with the mexican crisis of 1994 to 1995. Optimal redistribution in a sudden stop prone economy, with monica tran xuan, in progress skill premium, trade, and human capital, with camilo alvarez and samuel bailey. Gdp and c are about 4 percentage points below trend, and i collapses almost 20 percentage points below trend. Sudden stops are usually followed by a sharp decrease in output, private spending and credit to the private sector, and real exchange rate depreciation. Surges and sudden stops of capital flows to emerging markets. Sudden stop and economic performance in argentina and chile 5 8. It is truly exogenous, not the result of the unravelling of previous financial imbalances the typical recession trigger since the mid1980s. Capital controls and monetary policy in suddenstop economies. Thus, a sudden stop in ki im plies a sudden contraction in cad which, by equation 2, could be accom modated by lowering the dem and for tradable goods with no output cost.
Managing sudden stops vox, cepr policy portal voxeu. Similar qualitative results showing a surge in reserves are obtained comparing average reserves of sudden stop countries for the 19862004 period with those for the 19701985 period. We document that countries with higher levels of inequality exhibit higher levels of private borrowing and more recurrent sudden stop crisis. It is truly exogenous, not the result of the unravelling of previous financial imbalances the. As this sudden stop affected a very large number of heterogeneous countries in very different regions of the world at about the same time, it is very difficult to construe this sudden stop as the result of a coordinated reassessment of the economic fundamentals of individual countries or regions. That is an extraordinarily sudden stop of capital owing into the country in the space of 2 years. F31, f32, f34, f41 abstract this paper shows that the russian 1998 crisis had a big impact on capital flows to emerging market economies, ems, especially. When did firms anticipate the potential consequences of covid19.
In this economy, productivity growth is determined by successful implementation of business ideas, yet the quality of ideas is heterogeneous and good ideas are scarce. Economics plays a large role in todays society, as it affects the majority of our decisions, as well as the decisions made by other individuals, corporations and governments. Pdf sudden stop, financial factors and economic collpase in. A sudden stop to private capital inflows is usually very disruptive to an economy because. Oxford research encyclopedia of economics and finance, s. Sudden stops, capital flows, emerging markets, exchange rate. Homepage of anton korinek resources on sudden stops. Of course, the service sector in all affected countries are hit hard as restaurants and movie theatres empty out but it may well be manufacturing that takes the biggest hit. But the disaggregated data are even more distressing. This page provides online resources related to the paper from sudden stop to fisherian deflation.
This paper contributes to three strands in the economics literature. Table 1 lists 18 sudden stop episodes that occurred between 1994 and 2002. An equilibrium business cycle model with a collateral constraint explains this phenomenon as a result of the amplification and asymmetry that the constraint induces in the responses of macroaggregates to shocks. The sharp economic fluctuations experienced during sudden stops also display three key. Ia institute of labor economics iscussi ae seies iss iza dp no. In addition, the period since the early 1990s witnessed a surge in foreign reserves in most sudden stop countries. Section 2 lays out the theoretical linkages of surges in capital flows and their effect on the probability of a sudden stop and presents four testable hypotheses on the surge and sudden stop association. Pdf on the consequences of sudden stops researchgate. The paper also examines possible factors that could trigger sudden stops, and argues that the greater independence that countries have, as compared to regions of a given country, could help to explain why sudden stop crises are more prevalent and. For instance,mendoza2010 studies sudden stops in a standard representative rmagent real business cycle model augmented with a debtde ation mechanism. Sudden stops occur in both advanced and emerging economies, and result in deep recessions, collapsing asset prices and large real depreciations. Tracking the economic impact of covid19 and mitigation policies in europe and the united states 1 sophia chen, deniz igan, nicola pierri and andrea f. Sudden stops, the real exchange rate, and fiscal sustainability.
A global sudden stop the covid19 pandemic is the most devastating shock to hit the global economy since the second world war graph i. In the rst strand, sudden stop crises with nancial frictions have been studied using representativeagent models. Fiscal and monetary policies and the cost of sudden stops. Thus, our approach focuses on the impact of dollarization on the likelihood of a sudden stop, rather than on the consequences of dollarization and sudden stops on relevant variables such as economic growth, as in edwards 2003, for example. Pedro portugal is a senior researcher at the bank of portugal and invited. Sudden stops are typically accompanied by a substantial increase in the real exchange rate that breaks. This column analyses the sudden stops in capital flows to emerging markets since 1991. The study of economics usually begins with a student taking a principles of economics course. The median sudden stop displays a reversal in the cyclical component of nxy of about 3 percentage points at date t. Second, economic performance after a sudden stop can differ dramatically across countries, depending on certain country characteristics.
Calvo university of maryland the paper studies mechanisms through which a sudden stop in international credit flows may bring about financial and balance of payments crises. In a typical sudden stop, external funding declines by 10 percent or more, and its main impact lasts for over six years. How a decade of financial crises changed the world. Third, the 2009 sudden stop had a cleansing e ect on productivity while the 199293 did not. Sudden stop and macroeconomic adjustment in lac7, 19902002 128 8. The official numbers are worrisome enough, showing that growth slowed in the second quarter of this fiscal year to just 4. Once controlling for various preconditions and other factors, however, we find that monetary and fiscal tightening at the time of a sudden stop crisis significantly worsens output losses. Directorategeneral for economic and financial affairs. The sudden stop in economic activity has sharply undercut corporate revenues, placing firms at the epicentre of the pandemics economic fallout. Economic overview the developing sudden stop in global economic activity is now expected to translate into recessions in 2020 across latam as external demand collapses and local efforts to stop the spread of the novel coronavirus impair domestic growth. The recessions unique character poses unfamiliar policy challenges.
November 6, 2018 latest version abstract monetary policy procyclicality is a pervasive feature of emerging market economies. International capital flow reversals publications interamerican. Sudden stop, dollarization, financial crisis, and economic collapse. Sudden stops in capital flows are a form of financial whiplash that creates instability. Sudden stop and macroeconomic adjustment in chile, 19902002 3 8. A weak recovery follows, but gdp, c, and i remain below. In this paper, i propose a parsimonious theory explaining this fact in a. Fred bergsten senior fellow at the peterson institute for international economics and robert m. Classical references are minsky 1975 and kindleberger 1976. The covidinduced economic harm may soon result in multiple sovereign debtors moving into. All this means that, in contrast to the great financial crisis gfc of 200709, the present crisis has three key features. Similar qualitative results showing a surge in reserves are obtained comparing average reserves of sudden stop countries for. Sudden stops, misallocation and aggregate productivity. Mar 07, 2021 the genesis of the term sudden stop in the economic context is generally attributed to economist rudiger dornbusch et al, who authored a 1995 research paper on the mexican pesos collapse titled.
Studies capital controls and monetary policy in a sudden stop economy with financial frictions and nominal rigidities. Pdf sudden stop, financial factors and economic collpase. Leverage rises during expansions, and when it rises enough it triggers the constraint. The paper studies mechanisms through which a sudden stop in international credit flows may bring about financial and balance of payments. The other three lines in the gure break down these capital ows into those owing through the central bank, those to the government, and those to the private sector. Sudden stop, financial factors and economic collapse in latin america. April 30, 2015 abstract we show that a model with imperfectly forecastable changes in future productivity and an occasionallybinding collateral constraint can match a set of stylized facts about sudden stop events. Interest rate volatility and sudden stops board of governors of the. Pdf sudden stops, financial crises, and leverage semantic. League of nations 19261936, statistical year book, geneva. Capital controls and monetary policy in suddenstop economiesi michael b. Note that our estimation procedure is designed to capture the impact of the sudden stop.
These crises are characterized by the sudden stop of domestic or international credit flows and they are associated with large declines in consumption, output, relative prices, and asset prices. It shows that the frequency and duration of sudden stops have remained largely unchanged, but that the relative importance of different factors in their incidence has changed. Note that our estimation procedure is designed to capture the impact of the sudden stop beyond any initial turmoil or short. Optimal redistribution in a sudden stop prone economy, with monica tran xuan we explore the implications of household heterogeneity on the design and implementation of optimal macroprudential policies.
Oxford research encyclopedia of economics and finance, economics. Finally, there is suggestive evidence that links heterogeneity in price markups with changes in allocative e ciency throughout the sample. Of course, the service sector in all affected countries are hit hard as restaurants and movie theatres empty out but it may well be manufacturing that takes the biggest. Fellowship initiative the future of emu european economy. Educational comic books lesson plans and resources. E30,e50,f40 abstract this paper shows that foreign exchange intervention can be used to avoid a sudden stop in capital. Second, we provide novel evidence that increases in volatility in interest rates are contemporaneous to large declines in economic activity.
Sudden stops and optimal foreign exchange intervention j. We examine the nature of the recovery process, in an effort to assess to what extent the financial sector plays a role in determining the depth of the recession and the speed of recovery of the economy. Policies to contain the virus have deeply undercut economic activity. This paper analyzes the sudden stops in capital flows to emerging markets since 1991. Markets report global market stresses have translated most immediately to latam. Download pdf international finance discussion papers. Jan 21, 2019 however, equity and longterm bond financing may shield the economy from sudden stop crises. During the slump and into 2008, most capital in ows were private. The sudden stop phenomenon of emerging markets crises is characterized by three stylized facts. Emerging market economies often face sudden stops in capital inflows or. July 2020 lukas buchheim lmu munich and cesifo carla krolage ifo institute and lmu munich sebastian link ifo institute, lmu munich, iza and cesifo. Capital controls and monetary policy in suddenstop economiesi.
Output losses, financial crises, sudden stops, fiscal policy, financial policy. Department of economics placement directors 4101 hanson hall ellen r. A global sudden stop bank for international settlements. F31, f32, f34, f41 abstract this paper shows that the russian 1998 crisis had a big impact on capital flows to emerging market. We examine the nature of the recovery process, in an effort to assess to what extent the financial sector plays a role in determining the depth of the recession and the. Youngb, changhua yuc, avancouver school of economics, university of british columbia, nber and cepr. An assessment of the new mercantilism paperback pdf our online web service was released with a aspire to work as a full on the internet electronic catalogue that provides use of multitude of pdf book assortment. A sudden stop in capital flows is defined as a sudden slowdown in private capital inflows into emerging market economies, and a corresponding sharp reversal from large current account deficits into smaller deficits or small surpluses. With business closures and social distancing shutting down large parts of the economy, in this weeks analyst we refresh our growth forecasts to re.
Balance of payments crisis, sudden stop, capital flows. Optimal monetary policy under sudden stops federal. External conditions changed, and, starting with mexico in 1994, emerging market economiesincluding in asia in 1997, russia in 1998, and argentina in 2001experienced a sudden stop. Precautionary demand for foreign assets in sudden stop. As a result, economics is one of the most popular college majors.
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