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Sudden Stops and Currency Drops

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  • Luis Catão

Abstract

This paper shows that recent manifestations of sudden stops (SSs) in international capital flows have striking parallels in the early financial globalization era preceding World War I. All main capital-importing countries then faced episodic capital flow reversals averaging some 5 percent of GDP and with a median duration of four years. Most SSs also displayed striking crosscountry synchronization, being immediately preceded by rising world interest rates. Both fixed and floating exchange rate regimes were hit, with no significant differences between them. Yet, not all SSs resulted in currency drops: while some countries experienced currency collapses, others managed to preserve exchange rate stability. These different responses are related to domestic "frictions" that heightened the procyclicality of absorption and hindered precautionary reserve accumulation in some countries relative to others.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/133.

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Length: 61
Date of creation: 01 May 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/133

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Keywords: Exchange rate regimes; exchange rate; foreign capital; capital inflows; capital inflow; foreign capital inflow; capital flows; current account balance; net capital; capital exports; international capital flows; foreign capital inflows; exchange rates; nominal exchange rate; capital mobility; international capital; exchange rate determination; real exchange rate; currency risk; net capital flows; foreign capital flows; capital flow; nominal exchange rates; discount rates; global capital markets; capital flow reversals; spot exchange rate; capital markets; capital outflow; capital market; equilibrium exchange rate; exchange rate depreciation; foreign exchange; private capital inflows; exchange rate stability; capital outflows; capital market integration; net capital flow; cross-border financial flows; foreign exchange reserves; exchange rate behavior; real exchange rates; exchange rate levels; domestic credit; exchange rate change; effective exchange rates; flexible exchange rates; exchange rate adjustments; credit expansion; export of capital; international borrowing; relative exchange rate; spot exchange rates; currency appreciation; real exchange rate appreciation; private capital; fixed exchange rate; exchange rate appreciations; exchange rate developments; border capital flows; real exchange rate depreciation; gross domestic product; inflation rate; moral hazard; foreign investment; exchange rate risk; net capital outflow; floating exchange reserves; hard currency; domestic bond markets; exchange rate flexibility; floating exchange rates; real exchange rate appreciations; net capital outflows; exchange rate instability; exchange rate changes; currency pegs; world capital market; domestic credit expansion; exchange rate appreciation; exchange rate policy;

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Citations

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Cited by:
  1. Luis Catão & G. A. Mackenzie, 2006. "Perspectiveson Low Global Interest Rates," IMF Working Papers 06/76, International Monetary Fund.
  2. Michael D. Bordo, 2006. "Sudden Stops, Financial Crises, and Original Sin in Emerging Countries: Déjà vu?," NBER Working Papers 12393, National Bureau of Economic Research, Inc.

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