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Explaining Sudden Stops, Growth Collapse and BOP Crises: The Case of Distortionary Output Taxes

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Author Info
Guillermo A. Calvo
Abstract

The paper discusses a model in which growth is a negative function of fiscal burden. Moreover, growth discontinuously switches from high to low as fiscal burden reaches a critical level. Growth collapse is associated with a Sudden Stop of capital inflows, real depreciation and a drop in output (driven by a fall in the output of nontradables)-all of which have occurred during recent financial crises in Emerging Markets. The monetary version of the model is employed to show that BOP crises could be a result of fiscal distortions. In particular, it is further argued that BOP crisis could be a justifiable central bank response to growth collapse, although realistic circumstances may make this response highly ineffective. An important policy implication of the model is that in order to avoid Sudden Stop crises, policymakers should aim at improving fiscal institutions. Lowering the fiscal deficit is highly effective in the medium term

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9864.

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Date of creation: Jul 2003
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Handle: RePEc:nbr:nberwo:9864

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F3 - International Economics - - International Finance
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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  1. Calvo, Guillermo A, 1987. "Balance of Payments Crises in a Cash-in-Advance Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 19-32, February. [Downloadable!] (restricted)
  2. Ricardo J. Caballero & Arvind Krishnamurthy, 2003. "Excessive Dollar Debt: Financial Development and Underinsurance," Journal of Finance, American Finance Association, vol. 58(2), pages 867-894, 04. [Downloadable!] (restricted)
  3. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 513-548, December. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Campos, Nauro F & Kinoshita, Yuko, 2008. "Foreign Direct Investment and Structural Reforms: Evidence from Eastern Europe and Latin America," CEPR Discussion Papers 6690, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Hostland, Doug & Karam, Philippe, 2006. "Assessing debt sustainability in emerging market economies using stochastic simulation methods," Policy Research Working Paper Series 3821, The World Bank. [Downloadable!]
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  3. Matteo Bugamelli & Francesco Paternò, 2006. "Do Workers Remittances Reduce the Probability of Current Account Reversals?," CEP Discussion Papers dp0714, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
  4. Jurgen Von Hagen & Iulia Siedschlag, 2008. "Managing Capital Flows: Experiences from Central and Eastern Europe," Papers WP234, Economic and Social Research Institute (ESRI). [Downloadable!]
  5. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Yilmaz Akyüz, 2007. "Debt Sustainability in Emerging Markets: A Critical Appraisal," Working Papers 61, United Nations, Department of Economics and Social Affairs. [Downloadable!]
  7. Sebastián Edwards, 2005. "Managing the Capital Account," Working Papers Central Bank of Chile 338, Central Bank of Chile. [Downloadable!]
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