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Lending Booms, Sharp Reversals and Real Exchange Rate Dynamics

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  • Gopinath, Gita
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    Abstract

    Emerging markets in the 1990s experienced periods of booms followed by collapses in gross domestic product, consumption, traded and non-traded sector output and real exchange rate movements alongside unprecedented movements in foreign investor participation in these economies. An important feature of these episodes is the asymmetry in the pattern of booms and collapses. We introduce a natural search friction into the foreign investment decision in a small open economy and demonstrate that this can generate the asymmetry observed in the data. The magnitude of the reversals predicted by the model can be quantitatively large and empirically relevant.

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    File URL: http://dash.harvard.edu/bitstream/handle/1/11988005/Gopinath_LendingBooms.pdf
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    Bibliographic Info

    Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 11988005.

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    Date of creation: 2003
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    Publication status: Published in Journal of International Economics
    Handle: RePEc:hrv:faseco:11988005

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    1. James Tybout, 1998. "Manufacturing Firms In Developing Countries: How Well Do They Do, And Why?," Development and Comp Systems, EconWPA 9805004, EconWPA.
    2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, Elsevier, vol. 61(1), pages 163-185, October.
    3. Eric J. Bartelsman & Mark Doms, 2000. "Understanding productivity: lessons from longitudinal microdata," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2000-19, Board of Governors of the Federal Reserve System (U.S.).
    4. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(3), pages 397-415, July.
    5. Enrique G. Mendoza, 2002. "Credit, Prices, and Crashes: Business Cycles with a Sudden Stop," NBER Chapters, National Bureau of Economic Research, Inc, in: Preventing Currency Crises in Emerging Markets, pages 335-392 National Bureau of Economic Research, Inc.
    6. Ricardo D. Caballero & Eduardo Engel, 1998. "Nonlinear Aggregate Investment Dynamics: Theory and Evidence," Documentos de Trabajo, Centro de Economía Aplicada, Universidad de Chile 48, Centro de Economía Aplicada, Universidad de Chile.
    7. Richard Portes and H�l�ne Rey., 2000. "The Determinants of Cross-Border Equity Flows: The Geography of Information," Center for International and Development Economics Research (CIDER) Working Papers, University of California at Berkeley C00-111, University of California at Berkeley.
    8. R Portes & H Rey, 2000. "The Determinants Of Cross-Border Equity Flows," CEP Discussion Papers, Centre for Economic Performance, LSE dp0446, Centre for Economic Performance, LSE.
    9. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262150476, December.
    10. Cristina Arellano & Enrique Mendoza, 2002. "Credit Frictions and 'Sudden Stops' in Small Open Economies: An Equilibrium Business Cycle Framework for Emerging Markets Crises," Research Department Publications, Inter-American Development Bank, Research Department 4307, Inter-American Development Bank, Research Department.
    11. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    12. Dunne, T. & Roberts, M.J. & Samuelson, L., 1988. "Pattenrs Of Firm Entry And Exit In U.S. Manufacturing Industries," Papers, Pennsylvania State - Department of Economics 1-88-2, Pennsylvania State - Department of Economics.
    13. Uribe, Martin, 2002. "The price-consumption puzzle of currency pegs," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(3), pages 533-569, April.
    14. Cristina Arellano & Enrique G. Mendoza, 2002. "Credit Frictions and "Sudden Stop" in Small Open Economies: An Equilibrium Business Cycle Framework for Emerging Markets Crises," IDB Publications, Inter-American Development Bank 6499, Inter-American Development Bank.
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    Cited by:
    1. Mendoza, Enrique G. & Smith, Katherine A., 2006. "Quantitative implications of a debt-deflation theory of Sudden Stops and asset prices," Journal of International Economics, Elsevier, Elsevier, vol. 70(1), pages 82-114, September.
    2. Enrique G. Mendoza, 2008. "Sudden stops, financial crises and leverage: a Fisherian deflation of Tobin's Q," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 960, Board of Governors of the Federal Reserve System (U.S.).
    3. Enrique G. Mendoza, 2005. "Sudden Stops in an Equilibrium Business Cycle Model with Credit Constraints: A Fisherian Deflation of Tobin's Q," 2005 Meeting Papers, Society for Economic Dynamics 307, Society for Economic Dynamics.

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