EconPapers    
Economics at your fingertips  
 

Credit Frictions and "Sudden Stop" in Small Open Economies: An Equilibrium Business Cycle Framework for Emerging Markets Crises

Cristina Arellano and Enrique Mendoza

No 1440, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: Financial frictions are a central element of most of the models that the literature on emerging markets crises has proposed for explaining the Sudden Stop phenomenon. To date, few studies have aimed to examine the quantitative implications of these models and to integrate them with an equilibrium business cycle framework for emerging economies. This paper surveys these studies, viewing them as ability-to-pay and willingness-to-pay variations of a framework that adds occasionally binding borrowing constraints to the small open economy real-business-cycle model. A common feature of the different models is that agents factor in the risk of future Sudden Stops in their optimal plans, so that equilibrium allocations and prices are distorted even when credit constraints do not bind. Sudden Stops are a property of the unique, flexible-price competitive equilibrium of these models that occurs in a particular region of the state space in which negative shocks make borrowing constraints binding. The resulting nonlinear effects imply that solving the models requires non-linear numerical methods, which are described in the survey. The results show that the models can yield relatively infrequent Sudden Stops with large current account reversals and deep recessions nested within smoother business cycles. Still, research in this area is at an early stage, and this survey aims to stimulate further work.

Keywords: business cycles; developing countries; financial crises; WP-473; open economies; capital mobility; sudden stops; emerging market crises; credit (search for similar items in EconPapers)
Date: 2002-09
References: Add references at CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
https://publications.iadb.org/publications/english ... g-Markets-Crises.pdf (application/pdf)

Related works:
Working Paper: Credit Frictions and 'Sudden Stops' in Small Open Economies: An Equilibrium Business Cycle Framework for Emerging Markets Crises (2002) Downloads
Working Paper: Credit Frictions and 'Sudden Stops' in Small Open Economies: An Equilibrium Business Cycle Framework for Emerging Markets Crises (2002) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:1440

Access Statistics for this paper

More papers in IDB Publications (Working Papers) from Inter-American Development Bank Contact information at EDIRC.
Bibliographic data for series maintained by Felipe Herrera Library ().

 
Page updated 2025-03-30
Handle: RePEc:idb:brikps:1440