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Sudden Stops and Exchange Rate Strategies in Latin America

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  • Arturo Galindo

    ()

  • Alejandro Izquierdo

    ()

Abstract

An examination of several case studies in the region suggests that the ability to sustain a credible monetary policy depends on how vulnerable countries are to the impacts of sudden stops. In this respect, four aspects are of vital importance to ameliorate such impacts. Opening up the economy so that there is an increased supply of tradables will reduce the size of the fall in tradable absorption that is typically required by a sudden stop. Reducing the level of indebtedness will ensure that the required RER depreciation will be smaller. Lowering currency mismatches in the composition of debt relative to the composition of output will reduce vulnerability to valuation effects. Finally, the exposition to possible fiscal contingencies should also be addressed to reduce vulnerability of fiscal accounts, such as costly bank bailouts that stem from currency mismatches in the financial sector.

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Bibliographic Info

Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4327.

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Date of creation: Feb 2003
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Handle: RePEc:idb:wpaper:4327

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Cited by:
  1. Alexis Cruz-Rodriguez, 2013. "Choosing and Assessing Exchange Rate Regimes: a Survey of the Literature," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines, vol. 28(2), pages 37-61, October.
  2. Ibarra, Carlos A., 2004. "Capital Flows, Exchange Rate Regime, and Macroeconomic Performance in Mexico," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  3. Cristiano Prado Martins Barbosa, 2004. "Fatores Políticos E Institucionais: Impactos Sobre Paradas Bruscas De Financiamento Externo," Anais do XXXII Encontro Nacional de Economia [Proceedings of the 32th Brazilian Economics Meeting] 070, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

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