External Finance, Sudden Stops, and Financial Crisis: What is Different This Time?

Gulcin Ozkan and Filiz Unsal

No 2010/158, IMF Working Papers from International Monetary Fund

Abstract: This paper develops a two-country DSGE model to investigate the transmission of a global financial crisis to a small open economy. We find that economies hit by a sudden stop arising from financial distress in the global economy are likely to face a more prolonged crisis than sudden stop episodes of domestic origin. Moreover, in contrast to the existing literature, our results suggest that the greater a country's trade integration with the rest of the world, the greater the response of its macroeconomic aggregates to a sudden stop of capital flows.

Keywords: WP; financial crisis; risk premium; Sudden Stops; Financial Crises; Emerging Markets; capital goods; price level; production firm; net export; capital demand; domestic economy; economy variable; equilibrium mark-up; DSGE model; optimal contract; nominal price; price adjustment cost; Self-employment; Return on investment; Consumption; Currencies; Global (search for similar items in EconPapers)
Pages: 34
Date: 2010-07-01
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Citations: View citations in EconPapers (3)

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