Explaining Sudden Stop, Growth Collapse, and BOP Crisis: The Case of Distortionary Output Taxes

By Guillermo A. Calvo. International Monetary Fund Staff Papers, 2003

132 citations recorded by the source corpus.

The paper discusses a model in which growth is a negative function of fiscal burden. Moreover, growth discontinuously switches from high to low as fiscal burden reaches a critical level Growth collapse is associated with a sudden stop of capital inflows, real depreciation and a drop in output (driven by a fall in the output of nontradables)–all of which have occurred during recent financial crises in emerging markets. The monetary version of the model is employed to show that balance of payments (BOP) crises could be a result of fiscal distortions. In particular, it is further argued that BOP crisis could be a justifiable central bank response to growth collapse, although realistic circumstances may make this response highly ineffective. An important policy implication of the model is that in order to avoid sudden stop crises, policymakers should aim at improving fiscal institutions. Lowering the fiscal deficit is highly effective in the medium term, but could be counterproductive in the short run if it relies on higher taxes.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/25201fd4cc73b27c7a09f49cf7bc4701559c7caf

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Citations in the corpus

Sudden stops and the Mexican wave: Currency crises, capital flow reversals and output loss in emerging markets (2004, unknown): “Recent work by Calvo (1998), Kaminsky (2003) and others suggests that the fundamental causes of a currency crisis associated with sudden reversals in capital flows are empirically distinguishable from other varieties of currency crisis.”
The case for GDP‐indexed bonds (2004, unknown): “This phenomenon has been documented in the ‘sudden stops’ literature (Calvo, 2003), where international sovereign debt often fails to serve as a device for intertemporally smoothing the impact of such slowdowns.”
Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons (2002, background): “As argued in Calvo, 2002b, the government can play an important role in cases in which the economy is hit by lowprobability shocks, like the aftermath of the Russian 1998 crisis.2 However, and this is when the fisc kicks in, given the financial structure of the public sector, Argentina’s government…”