The Dynamic Consequences of Inflow-driven Sudden Stops

Romain Houssa and Jean Paul Madrigal Rodríguez

No 12890, CESifo Working Paper Series from CESifo

Abstract: This paper studies the macroeconomic effects of sudden stops using a newly constructed database that expands country coverage to 137 economies and extends the sample to 1985Q1–2025Q4. We document a new wave of sudden-stop episodes in the 2020s, partly reversing the apparent decline observed after the post-global-financialcrisis. Local-projection estimates show that sudden stops are typically preceded by economic expansions and followed by persistent output losses lasting up to two years. The contraction is driven mainly by sharp declines in investment and consumption, while net exports rise because imports contract more strongly than exports. The results reveal two distinct transmission mechanisms. Sudden stops in net external financing operate through forced external adjustment and import compression, with larger and more persistent effects under pegged exchange-rate regimes. By contrast, gross-inflow sudden stops operate through financial conditions: leverage rises, credit conditions tighten, asset prices fall, and investment declines. This financial transmission of gross-inflow sudden stops also differs across country groups, reflecting differences in financial structure. Developing countries are more exposed to increases in financing costs, whereas advanced economies display stronger debt deflation and asset-price effects.

Keywords: inflow-driven sudden stops; dynamics; local projections; economic growth (search for similar items in EconPapers)
JEL-codes: C33 C51 E3 E43 E52 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12890

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