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Fear of Sudden Stops: Lessons From Australia and Chile 1

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Author Info
Ricardo Caballero
Kevin Cowan
Jonathan Kearns

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Abstract

Latin American economies are exposed to substantial external vulnerability. Domestic imbalances and terms of trade shocks are often exacerbated by sharp shifts in the net supply of external capital (sudden stops). At times, these sudden stops can be the main shock. In this paper we explore ways of overcoming external vulnerability, drawing lessons from a detailed comparison of the response of Chile and Australia to recent external shocks and from Australia’s historical experience. We argue that in order to understand sudden stops and the mechanisms to smooth them it is useful to identify and then distinguish between two inter-related dimensions of investors’ confidence: country-trust and currency-trust . Lack of country-trust is the fundamental problem behind sudden stops. Lack of currency-trust in turn weakens a country’s ability to deal with sudden stops and real external shocks. We discuss steps aimed to improve these two dimensions of investors’ confidence in the medium run, and policies to reduce the impact of country-trust and currency-trust weaknesses in the short run.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal The Journal of Policy Reform.

Volume (Year): 8 (2005)
Issue (Month): 4 (December)
Pages: 313-354
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Handle: RePEc:taf:jpolrf:v:8:y:2005:i:4:p:313-354

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Related research
Keywords: Sudden stops; Australia; Chile; F33;

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References listed on IDEAS
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  2. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December. [Downloadable!] (restricted)
    Other versions:
  3. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2003. "Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why it Matters," NBER Working Papers 10036, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, vol. 45(7), pages 1121-1150. [Downloadable!] (restricted)
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  6. Stephen Grenville, 1997. "The Evolution of Monetary Policy: From Money Targets to Inflation Targets," RBA Annual Conference Volume, in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia. [Downloadable!]
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  9. Ricardo J. Caballero, 2002. "Coping with Chile’s External Vulnerability: A Financial Problem," Working Papers Central Bank of Chile 154, Central Bank of Chile. [Downloadable!]
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  10. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May. [Downloadable!] (restricted)
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  11. Javier Gómez, 2004. "Inflation Targeting and Sudden Stops," BORRADORES DE ECONOMIA 002854, BANCO DE LA REPÚBLICA. [Downloadable!]
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  18. Ricardo J. Caballero & Arvind Krishnamurthy, 2003. "Excessive Dollar Debt: Financial Development and Underinsurance," Journal of Finance, American Finance Association, vol. 58(2), pages 867-894, 04. [Downloadable!] (restricted)
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    Other versions:
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