When Do Sudden Stops Really Hurt?

This paper analyzes the drivers and consequences of sudden stops of capital flows. It focuses on the impact of external vulnerability on the depth and length of sudden stop crises. The authors analyze 43 developing and developed countries between 1...

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Bibliographic Details
Main Authors:	Caner, Mehmet, Koehler-Geib, Fritzi, Vincelette, Gallina Andronova
Format:	Policy Research Working Paper
Language:	English
Published:	2012
Subjects:	ADJUSTMENT DYNAMICS ADJUSTMENT PATH ANNUAL GROWTH ANNUAL GROWTH RATE ASSET POSITIONS BANKING SECTOR BASIS POINTS BOND BOND INDEX CAPITAL FLOW CAPITAL FLOWS CAPITAL FORMATION COMMODITY COMMODITY EXPORTS COMMODITY PRICES CONSUMPTION EXPENDITURE COUNTRY SPECIFIC CREDIT GROWTH CREDIT RATINGS CURRENCY CURRENCY COMPOSITION CURRENCY CRISES CURRENCY DATA CURRENCY MISMATCHES CURRENT ACCOUNT CURRENT ACCOUNT BALANCE CURRENT ACCOUNT DEFICIT CURRENT ACCOUNT DEFICITS DATA SETS DEBT DEMAND DEPOSITS DEPENDENT VARIABLE DEPOSITS DEPRECIATION DESCRIPTIVE STATISTICS DEVELOPED COUNTRIES DEVELOPING COUNTRIES DEVELOPMENT ECONOMICS DOMESTIC CURRENCY DOMESTIC MARKET DUMMY VARIABLE DUMMY VARIABLES ECONOMETRIC ANALYSIS ECONOMIC GROWTH ECONOMIC POLICY ECONOMICS EMERGING ECONOMIES EMERGING MARKET EMERGING MARKET COUNTRIES EMERGING MARKET ECONOMIES EMERGING MARKETS EMPIRICAL RESULTS EQUATIONS EQUILIBRIUM ERROR TERM ERROR TERMS ESTIMATION RESULTS EXCHANGE RATE FLUCTUATIONS EXPORTERS EXTERNAL FINANCING EXTERNAL IMBALANCES FEDERAL RESERVE FEDERAL RESERVE BANK FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL FLOWS FINANCIAL FRAGILITY FINANCIAL MARKET FINANCIAL OPENNESS FINANCIAL RISKS FINANCIAL STUDIES FISCAL BALANCES FIXED CAPITAL FIXED EFFECTS FIXED EFFECTS ESTIMATION FIXED RATES FOREIGN CURRENCY FOREIGN CURRENCY ASSETS FOREIGN CURRENCY LENDING FOREIGN DIRECT INVESTMENT FOREIGN FINANCING FOREIGN LIABILITIES FOREIGN RESERVES GDP GDP PER CAPITA GROSS DOMESTIC PRODUCT GROSS FIXED CAPITAL FORMATION GROWTH EQUATION GROWTH IMPACT GROWTH PERFORMANCE GROWTH RATE GROWTH RATES IMBALANCES IMPORTS INCOME GROWTH INCOME LEVELS INDEBTEDNESS INDEPENDENT MONETARY POLICY INDUSTRIALIZED COUNTRIES INFLOWS OF CAPITAL INTERNATIONAL BANK INTERNATIONAL FINANCIAL MARKETS INVESTMENT RATIO LIABILITY LONG RUN MACROECONOMIC VARIABLES MATURITIES MATURITY MATURITY MISMATCHES MAXIMUM LIKELIHOOD ESTIMATION NEGATIVE EFFECT NEGATIVE IMPACT NORMAL DISTRIBUTION 0 HYPOTHESIS OUTPUT OUTPUT GROWTH OUTPUT LOSS OUTPUT LOSSES OUTPUT PER CAPITA PER CAPITA GROWTH PER CAPITA INCOME PER CAPITA INCOME LEVELS POLICY RESEARCH POPULATION GROWTH POVERTY REDUCTION RAPID GROWTH REAL EXCHANGE RATE REAL GDP REGIONAL DUMMIES RELATIVE PRICES RESERVE MONEY RETURN RISK AVERSION ROBUSTNESS CHECK ROBUSTNESS CHECKS SPEED OF ADJUSTMENT STANDARD DEVIATIONS TIME HORIZON TRADABLE GOODS TRADE BALANCE TRADE BALANCES TRADE SHOCK TRADE SHOCKS TRANSITION ECONOMIES VALUE ADDED VOLATILITY
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_20090820133012 http://hdl.handle.net/10986/4214

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Summary:	This paper analyzes the drivers and consequences of sudden stops of capital flows. It focuses on the impact of external vulnerability on the depth and length of sudden stop crises. The authors analyze 43 developing and developed countries between 1993 and 2006. They find evidence that external vulnerability not only significantly impacts the probability of a sudden stop crisis, but also prolongs the time it takes for growth to revert to its long-term trend once a sudden stop occurs. Interestingly, external vulnerability does not significantly impact the size of the instantaneous output effect in case of a sudden stop but prompts a cumulative output effect through significantly diminishing the speed of adjustment of output to its trend. This finding implies that countries financing a large part of their absorption externally do not suffer more ferocious output losses in a sudden stop crisis, but take longer to adapt afterward and are hence expected to suffer more protracted crises periods. Compared with previous literature, this paper makes three contributions: (i) it extends the country and time coverage relative to datasets that have previously been used to analyze related topics; (ii) it specifically accounts for time-series autocorrelation; and (iii) it provides an analysis of the adjustment path of economic growth after a sudden stop.

When Do Sudden Stops Really Hurt?

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