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Sudden stops and currency crises

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Author Info

  • Levan Efremidze
  • Samuel M. Schreyer
  • Ozan Sula

Abstract

Purpose – The purpose of this paper is to examine empirical characteristics of two commonly mentioned expressions of international financial crisis, “sudden stops” and currency crises. Design/methodology/approach – Sudden stop and currency crisis events are identified and empirical regularities among them are analyzed based on the annual data of 25 emerging market countries from 1990 to 2003. Findings – Puzzlingly, these two seemingly close expressions of crises overlap less than 50 percent of the time and sudden stops more frequently precede than follow currency crises. Also the two different sudden stop measures are not strongly correlated with each other. Research limitations/implications – This shows that it can make a great deal of difference what measure is used and suggests that studies in this area should be sure to check the robustness of their results to different measures. Practical implications – The authors think that the proper analysis should focus on how to use these different measures to understand the nature of the crises. Thus, sudden stop and currency crisis measures should be used as complements, rather than substitutes. Social implications – The alarming frequency of the emerging market crises during the last three decades has motivated a large volume of theoretical and empirical literature on the subject. The paper's results advance understanding of these events. Originality/value – A large body of studies on currency crises coexists with a growing literature on sudden stops yet a majority of the studies that investigate either one of these phenomena do not mention the other. The paper adds value by investigating empirical relationships between them.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Financial Economic Policy.

Volume (Year): 3 (2011)
Issue (Month): 4 (November)
Pages: 304-321

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Handle: RePEc:eme:jfeppp:v:3:y:2011:i:4:p:304-321

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Related research

Keywords: Capital movements; Current account adjustment; Financial markets; International business; International economics; International factor movements; International finance; International investments; International trade; Macroeconomics; Open economy;

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References

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  1. Ceyhun Bora Durdu & Enrique G. Mendoza & Marco E. Terrones, 2007. "Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism," NBER Working Papers 13123, National Bureau of Economic Research, Inc.
  2. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2006. "Sudden Stops and Phoenix Miracles in Emerging Markets," American Economic Review, American Economic Association, vol. 96(2), pages 405-410, May.
  3. Kevin Cowan & Jose De Gregorio & Alejandro Micco & Christopher Neilson, 2007. "Financial Diversification, Sudden Stops and Sudden Starts," Working Papers Central Bank of Chile 423, Central Bank of Chile.
  4. Calvo, Guillermo A. & Izquierdo, Alejandro & Loo-Kung, Rudy, 2006. "Relative price volatility under Sudden Stops: The relevance of balance sheet effects," Journal of International Economics, Elsevier, vol. 69(1), pages 231-254, June.
  5. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2008. "Systemic Sudden Stops: The Relevance of Balance-Sheet Effects and Financial Integration," Research Department Publications 4581, Inter-American Development Bank, Research Department.
  6. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," IDB Publications 6516, Inter-American Development Bank.
  7. Gian Maria Milesi-Ferrett & Assaf Razin, 1998. "Current Account Reversals and Currency Crises: Empirical Regularities," NBER Working Papers 6620, National Bureau of Economic Research, Inc.
  8. Edwards, Sebastian, 2006. "Monetary Unions, External Shocks and Economic Performance," Working Papers 126, Oesterreichische Nationalbank (Austrian Central Bank).
  9. Francisco Gallego & Geraint Jones, 2006. "Exchange Rate Interventions and Insurance: Is Fear of Floating a Cause for Concern?," Central Banking, Analysis, and Economic Policies Book Series, in: Ricardo Caballero & César Calderón & Luis Felipe Céspedes & Norman Loayza (Series Editor) & Klaus (ed.), External Vulnerability and Preventive Policies, edition 1, volume 10, chapter 11, pages 353-398 Central Bank of Chile.
  10. Paul Krugman, 2000. "Fire-Sale FDI," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 43-58 National Bureau of Economic Research, Inc.
  11. Sula, Ozan, 2006. "Surges and Sudden Stops of Capital Flows to Emerging Markets," MPRA Paper 383, University Library of Munich, Germany.
  12. Hutchison, Michael M. & Noy, Ilan & Wang, Lidan, 2010. "Fiscal and monetary policies and the cost of sudden stops," Journal of International Money and Finance, Elsevier, vol. 29(6), pages 973-987, October.
  13. Pablo E. Guidotti & Federico Sturzenegger & Agustín Villar, 2004. "On the Consequences of Sudden Stops," Journal of LACEA Economia, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  14. Komarek, Lubos & Melecky, Martin, 2005. "Currency Crises, Current Account Reversals and Growth : The Compounded Effect for Emerging Markets," The Warwick Economics Research Paper Series (TWERPS) 735, University of Warwick, Department of Economics.
  15. Cavallo, Eduardo A. & Frankel, Jeffrey A., 2008. "Does openness to trade make countries more vulnerable to sudden stops, or less? Using gravity to establish causality," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1430-1452, December.
  16. Paolo Mauro & Andrei A. Levchenko, 2006. "Do Some Forms of Financial Flows Help Protect from Sudden Stops?," IMF Working Papers 06/202, International Monetary Fund.
  17. Honig, Adam, 2008. "Do improvements in government quality necessarily reduce the incidence of costly sudden stops?," Journal of Banking & Finance, Elsevier, vol. 32(3), pages 360-373, March.
  18. Sebastian Edwards, 2006. "Monetary Unions, External Shocks and Economic Performance: A Latin American Perspective," Working Papers 43, Bank of Greece.
  19. Joyce, Joseph P. & Nabar, Malhar, 2009. "Sudden stops, banking crises and investment collapses in emerging markets," Journal of Development Economics, Elsevier, vol. 90(2), pages 314-322, November.
  20. Levan Efremidze & Akinori Tomohara, 2011. "Have the Implications of Twin Deficits Changed?: Sudden Stops over Decades," International Advances in Economic Research, Springer, vol. 17(1), pages 66-76, February.
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  23. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
  24. Ortiz, Alberto & Pablo, Ottonello & Sturzenegger, Federico & Talvi, Ernesto, 2007. "Monetary and Fiscal Policies in a Sudden Stop: Is Tighter Brighter?," Working Paper Series rwp07-057, Harvard University, John F. Kennedy School of Government.
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Citations

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Cited by:
  1. Torsten Schmidt & Lina Zwick, 2013. "Uncertainty and Episodes of Extreme Capital Flows in the Euro Area," Ruhr Economic Papers 0461, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  2. William R. Clark, 2012. "Measures of financial openness and interdependence," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 4(1), pages 58-75, April.

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