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Relative price volatility under Sudden Stops: The relevance of balance sheet effects

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  • Calvo, Guillermo A.
  • Izquierdo, Alejandro
  • Loo-Kung, Rudy

Abstract

Sudden Stops are associated with increased volatility in relative prices. We introduce a model based on information acquisition to rationalize this increased volatility. An empirical analysis of the conditional variance of the wholesale price to consumer price ratio using panel ARCH techniques confirms the relevance of Sudden Stops and potential balance-sheet effects as key determinants of relative-price volatility, where balance-sheet effects are captured by the interaction of a proxy for potential changes in the real exchange rate (linked to the degree of external leverage of the absorption of tradable goods) and a measure of domestic liability dollarization.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 69 (2006)
Issue (Month): 1 (June)
Pages: 231-254

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Handle: RePEc:eee:inecon:v:69:y:2006:i:1:p:231-254

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Web page: http://www.elsevier.com/locate/inca/505552

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
  2. Sergio Rebelo & Ariel Burstein & Martin Eichenbaum, 2004. "Large Devaluations and the Real Exchange Rate," 2004 Meeting Papers 137, Society for Economic Dynamics.
  3. Banerjee, Abhijit & Bacchetta, Philippe & Aghion, Philippe, 2001. "Currency Crises and Monetary Policy in an Economy with Credit Constraints," Scholarly Articles 4554218, Harvard University Department of Economics.
  4. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons," IDB Publications 6821, Inter-American Development Bank.
  5. Guillermo A. Calvo, 2005. "Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262033348, December.
  6. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," Research Department Publications, Inter-American Development Bank, Research Department 4367, Inter-American Development Bank, Research Department.
  7. Graciela L. Kaminsky & Carmen M. Reinhart, 2001. "Financial Markets in Times of Stress," NBER Working Papers 8569, National Bureau of Economic Research, Inc.
  8. de la Torre, Augusto & Schmukler & Sergio L., 2004. "Coping with risk through mismatches : domestic and international financial contracts for emerging economies," Policy Research Working Paper Series 3212, The World Bank.
  9. Rigobon, Roberto, 2002. "The curse of non-investment grade countries," Journal of Development Economics, Elsevier, vol. 69(2), pages 423-449, December.
  10. Ricardo Hausmann & Ugo Panizza & Roberto Rigobon, 2004. "The Long-Run Volatility Puzzle of the Real Exchange Rate," NBER Working Papers 10751, National Bureau of Economic Research, Inc.
  11. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
  12. Guillermo A. Calvo & Alejandro Izquierdo & Rudy Loo-Kung, 2005. "Relative Price Volatility Under Sudden Stops: The Relevance of Balance Sheet Effects," NBER Working Papers 11492, National Bureau of Economic Research, Inc.
  13. Bollerslev, Tim & Ole Mikkelsen, Hans, 1996. "Modeling and pricing long memory in stock market volatility," Journal of Econometrics, Elsevier, Elsevier, vol. 73(1), pages 151-184, July.
  14. International Monetary Fund, 2000. "Spillovers Through Banking Centers," IMF Working Papers 00/88, International Monetary Fund.
  15. Honohan, Patrick & Shi, Anging, 2001. "Deposit dollarization and the financial sector in emerging economies," Policy Research Working Paper Series 2748, The World Bank.
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