Sudden stops: are global and local investors alike ?

Cesar Calderon () and Megumi Kubota

No 5569, Policy Research Working Paper Series from The World Bank

Abstract: The main goal of this paper is to characterize the determinants of sudden stops caused by domestic vis-a-vis foreign residents. Are the decisions of domestic investors to invest abroad or of foreign investors to cut off funds from the domestic economy governed by the same set of determinants? Given the distribution of different types of sudden stop episodes over time and its different macroeconomic consequences, the authors argue that the determinants may not be alike. Using an effective sample of 82 countries with annual information over the period 1970-2007, the analysis finds that global investors are less likely to stop bringing their capital when their economy is growing and the world interest rate is lower. Domestic agents are more willing to invest abroad if the macroeconomic performance of the domestic economy is poor (high inflation), the financial system is weak, and there are high external savings (current account surpluses). Increasing financial openness makes the domestic country more vulnerable to sudden stops caused by either local or global investors. Finally, countries with higher shares of foreign direct investment are less prone to inflow-driven sudden stops, whereas the opposite holds for outflow-driven sudden stops.

Keywords: Debt Markets; Emerging Markets; Currencies and Exchange Rates; Economic Theory&Research; Access to Finance (search for similar items in EconPapers)
Date: 2011-02-01
New Economics Papers: this item is included in nep-ifn and nep-opm
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Citations: View citations in EconPapers (7)

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Journal Article: Sudden stops: Are global and local investors alike? (2013)
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