On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects

Guillermo Calvo, Alejandro Izquierdo and Luis Fernando Mejía

No 10520, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using a sample of 32 developed and developing countries we analyze the empirical characteristics of sudden stops in capital flows and the relevance of balance sheet effects in the likelihood of their materialization. We find that large real exchange rate (RER) fluctuations coming hand in hand with Sudden Stops are basically an emerging market (EM) phenomenon. Sudden Stops seem to come in bunches, grouping together countries that are different in many respects. However, countries are similar in that they remain vulnerable to large RER fluctuations - be it because they could be forced to large adjustments in the absorption of tradable goods, and/or because the size of dollar liabilities in the banking system (i.e., domestic liability dollarization, or DLD) is high. Openness, understood as a large supply of tradable goods that reduces leverage over the current account deficit, coupled with DLD, are key determinants of the probability of Sudden Stops. The relationship between Openness and DLD in the determination of the probability of Sudden Stops is highly non-linear, implying that the interaction of high current account leverage and high dollarization may be a dangerous cocktail.

JEL-codes: F31 F32 (search for similar items in EconPapers)
Date: 2004-05
New Economics Papers: this item is included in nep-acc and nep-ifn
Note: IFM
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Citations: View citations in EconPapers (536)

Published as Guillermo Calvo & Alejandro Izquierdo & Luis-Fernando Mejía, 2004. "On the empirics of Sudden Stops: the relevance of balance-sheet effects," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.

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Journal Article: On the empirics of Sudden Stops: the relevance of balance-sheet effects (2004)
Working Paper: On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects (2004)
Working Paper: On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects (2004)
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