Sudden Stops : Are Global and Local Investors Alike?
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 econ...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110214154448 http://hdl.handle.net/10986/3336 |
| Summary: | 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. |
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