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Uncertainty about the fundamentals and the occurrence of sudden stops of capital flows: Theory and Empirics

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  • Fritzi Koehler-Geib
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    Abstract

    We analyse the effect of the uncertainty about the fundamentals on the probability of sudden stops of capital flows from a theoretical and empirical perspective. Our model predicts that the probability of crises increases with the uncertainty, ie. the dispersion of private signals about the true value of the fundamentals. Using two datasets of Consensus and WES forecasts for 31 developed and developing countries for the time period from January 1990 until December 2001 we verify the theoretical prediction. We apply probit estimation controlling for time and country effects. Additionally, we show that the result is robust for numerous speci¯cations.

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    File URL: http://www.bgpe.de/texte/DP/018_koehler.pdf
    File Function: First version, 2006
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    Bibliographic Info

    Paper provided by Bavarian Graduate Program in Economics (BGPE) in its series Working Papers with number 018.

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    Length: 48 pages
    Date of creation: Oct 2006
    Date of revision:
    Handle: RePEc:bav:wpaper:018_koehler

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    Web page: http://www.bgpe.de/
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    Related research

    Keywords: Capital Flows; Government debt; Sudden Stops; Global Games; Coordination Failure;

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    References

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    1. Eduardo A. Cavallo & Jeffrey Frankel, 2007. "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, or Less? Using Gravity to Establish Causality," Research Department Publications, Inter-American Development Bank, Research Department 4544, Inter-American Development Bank, Research Department.
    2. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, Econometric Society, vol. 58(6), pages 1255-77, November.
    3. M. Sbracia & Alessandro Prati, 2002. "Currency Crises and Uncertainty About Fundamentals," IMF Working Papers 02/3, International Monetary Fund.
    4. Barry Eichengreen & Poonam Gupta & Ashoka Mody, 2008. "Sudden Stops and IMF-Supported Programs," NBER Chapters, in: Financial Markets Volatility and Performance in Emerging Markets, pages 219-266 National Bureau of Economic Research, Inc.
    5. Sebastian Edwards, 2005. "Capital Controls, Sudden Stops and Current Account Reversals," NBER Working Papers 11170, National Bureau of Economic Research, Inc.
    6. Morris, Stephen & Shin, Hyun Song, 2004. "Coordination risk and the price of debt," European Economic Review, Elsevier, Elsevier, vol. 48(1), pages 133-153, February.
    7. Hellwig, Christian, 2002. "Public Information, Private Information, and the Multiplicity of Equilibria in Coordination Games," Journal of Economic Theory, Elsevier, Elsevier, vol. 107(2), pages 191-222, December.
    8. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, Econometric Society, vol. 61(5), pages 989-1018, September.
    9. Heinemann, Frank & Illing, Gerhard, 2002. "Speculative attacks: Unique equilibrium and transparency," Munich Reprints in Economics, University of Munich, Department of Economics 19430, University of Munich, Department of Economics.
    10. Guillermo A. Calvo, 2003. "Explaining Sudden Stops, Growth Collapse and BOP Crises: The Case of Distortionary Output Taxes," NBER Working Papers 9864, National Bureau of Economic Research, Inc.
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