On the Consequences of Sudden Stops

By P. Guidotti, Federico Sturzenegger, Agustín Villar. 2004

168 citations recorded by the source corpus.

Our analysis shows a number of interesting empirical regularities. First, when we apply a simple definition of sudden stops, we find that they have been a fairly common occurrence at least since the late 1970s. Second, economic performance after a sudden stop can differ dramatically across countries, depending on certain country characteristics. We show that open economies and those that choose a floating exchange rate regime after a crisis recover fairly quickly from the output contraction that usually comes with the sudden stop, whereas countries with liability dollarization recover more slowly. These characteristics relate to how the economies adjust exports and imports during the aftermath of a sudden stop. Open economies that do not show much liability dollarization tend to show higher export growth and less import contraction than highly dollarized economies. The paper is organized as follows. The next section discusses our definition of sudden stops. We then examine the stylized facts associated with sudden stops, including their regional coverage and evolution over time. A subsequent section proceeds to identify the key factors that explain the nature of the aftermath of a sudden stop in capital flows. If sudden stops remain a recurrent feature of emerging market economies in years to come, the issue of how to ensure a quick return of growth in the aftermath of a crisis will require attention. Policy recommendations focused on improving such ex post performance should go hand in hand with traditional prevention measures designed to avoid the crises. We elaborate on these conclusions in the final section.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/8828ebe8c5d608da5557a36534a1e20f349ccac2

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Citations in the corpus

Do Some Forms of Financial Flows Help Protect Against "Sudden Stops"? (2007, methodology): “To alleviate this problem, some studies use a combination of criteria, such as a 5 percentage point of GDP cutoff combined with the change being greater than one standard deviation (Guidotti, Sturzenegger, and Villar 2004).”
Sovereign Default, Domestic Banks, and Financial Institutions (2013, methodology): “As a result, we also adopt other approaches, such as trying different thresholds, or using the (continuous) change in current account deficit, based on the work of Guidotti et al. (2004) and others, and our results are unaffected.”
The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications (2006, unknown): “- 33 - Guidotti, Pablo, Federico Sturzenegger, and Agustin Villar, 2004, “On the Consequences of Sudden Stops,” Economía, Vol. 4, No. 2, pp.171–203.”
The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications (2011, unknown): “In line with Guidotti et al (2004), we identify a sudden stop in year t if the ratio of capital in ows to GDP, kt KAt=Yt , falls by more than 5 percent relative to the previous year, sudden stop in year t , kt < kt 1 5%: The countries in our sample and the years in which they had a sudden stop are…”
Output Volatility and Openness to Trade: A Reassessment (2009, background): “…vulnerability, see, for example, Calvo, Izquierdo, and Mejía (2004); Edwards (2004); Cavallo and Frankel (2008); Martin and Rey (2006); on adjustment following external shocks, see Sachs (1985); Calvo and Talvi (2005); Guidotti, Sturzenegger, and Villar (2004). trade might reduce output volatility.”
Overreaction in capital flows to emerging markets: Booms and sudden stops☆ (2012, methodology): “…we call capital boom to emerging markets those that are largely unusual as determined by a standard deviation over the historical mean and are at least a five percentage of GDP. Based on a paper of Guidotti et al. (2004) we define periods of abrupt reversions or sudden stops in a very close way.”