Fear of Sudden Stops: Lessons from Australia and Chile

Ricardo Caballero (), Kevin Cowan () and Jonathan Kearns

No 10519, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Latin American economies are exposed to substantial external vulnerability. Domestic imbalances and terms of trade shocks are often exacerbated by sudden stops of capital inflow. In this paper we explore ways of overcoming external vulnerability, drawing lessons from a detailed comparison of the response of Chile and Australia to recent external shocks and from Australia's historical experience. We argue that in order to understand sudden stops and the mechanisms to smooth them, it is useful to identify and then distinguish between two inter-related dimensions of investors' confidence: country-trust and currency-trust. Lack of country-trust is a more fundamental and serious problem behind sudden stops. But lack of currency-trust may both be a source of country-trust problems and weaken a country's ability to deal with sudden stops. We discuss steps to improve along these two dimensions of investors' confidence in the medium run, and policies to reduce the impact of country-trust and currency-trust weaknesses in the short run.

JEL-codes: E44 E52 (search for similar items in EconPapers)
Date: 2004-05
New Economics Papers: this item is included in nep-ifn
Note: EFG IFM
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Citations: View citations in EconPapers (47)

Published as Ricardo J. Caballero & Kevin Cowan & Jonathan Kearns, 2005. "Fear of Sudden Stops: Lessons From Australia and Chile," The Journal of Policy Reform, vol 8(4), pages 313-354.

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Related works:
Working Paper: Fear of Sudden Stops: Lessons from Australia and Chile (2005)
Working Paper: Fear of Sudden Stops: lessons from Australia and Chile (2004)
Working Paper: Fear of Sudden Stops: Lessons from Australia and Chile (2004)
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