This paper investigates the relationship between trade openness and the current account reversal cost in economies that have experienced sudden stops. At the beginning of such episode, governments usually attempt to equilibrate the balance of payments spending international reserves, but sudden stops use to linger on up to a RER depreciation. A simple model shows more intense trade balance response to RER depreciation in more open economies. This stronger response makes the current account reversal less costly. We confirmed the model prediction for developing countries in an empirical exercise involving 53 countries' quarterly data series between 1970 and 2003.
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Length: Date of creation: 2005 Date of revision: Handle: RePEc:anp:en2005:081
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Find related papers by JEL classification: F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation