Fear of Sudden Stops: Lessons from Australia and Chile

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

RBA Research Discussion Papers from Reserve Bank of Australia

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.

Keywords: sudden stops; Australia; Chile (search for similar items in EconPapers)
JEL-codes: E44 E52 F31 F33 (search for similar items in EconPapers)
Date: 2004-05
New Economics Papers: this item is included in nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (44)

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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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Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp2004-03

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