The Simple Analytics of Sudden Stops

Peter Montiel

Open Economies Review, 2013, vol. 24, issue 2, 267-281

Abstract: Currency crises in emerging and developing countries have often been characterized by “sudden stops” of capital flows. A variety of mechanisms have been adduced to explain the emergence of this phenomenon. This paper integrates these mechanisms into a simple and transparent analytical model in which currency mismatches, large current account deficits, and large stocks of short-term debt interact with low reserve stocks to generate dual equilibria. In this context, the “panic” equilibrium is characterized by a currency crisis, a sudden stop, and an output collapse. The potential for various policies to avoid this outcome is explored, as are the implications of the analysis for reserve accumulation. Copyright Springer Science+Business Media New York 2013

Keywords: Currency crises; Mismatches; Multiple equilibria; Sudden stops; F32; F41 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s11079-012-9241-9

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