Sudden stops and financial frictions : evidence from industry level data
AbstractThe nature of the microeconomic frictions that transform sudden stops in output collapses is not only of academic interest, but also crucial for the correct design of policy responses to prevent and address these episodes and the lack of evidence on this regard is an important shortcoming. This paper uses industry-level data in a sample of 45 developed and emerging countries and a differences-in-differences methodology to provide evidence of the role of financial frictions for the consequences of sudden stops. The results show that, consistently with financial frictions being important, industries that are more dependent on external finance decline significantly more during a sudden stop, especially in less financially developed countries. The results are robust to controlling for other possible mechanisms, including labor market frictions. The paper also provides results on the role of comparative advantage during sudden stops and on the usefulness of various policy responses to attenuate the consequences of these shocks.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 5605.
Date of creation: 01 Mar 2011
Date of revision:
Debt Markets; Emerging Markets; Access to Finance; Currencies and Exchange Rates; Economic Theory&Research;
Other versions of this item:
- Cowan, Kevin & Raddatz, Claudio, 2013. "Sudden stops and financial frictions: Evidence from industry-level data," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 99-128.
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
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- Aizenman, Joshua & Sushko, Vladyslav, 2011.
"Capital Flow Types, External Financing Needs, and Industrial Growth: 99 countries, 1991-2007,"
Santa Cruz Department of Economics, Working Paper Series
qt3fb716f8, Department of Economics, UC Santa Cruz.
- Joshua Aizenman & Vladyslav Sushko, 2011. "Capital Flow Types, External Financing Needs, and Industrial Growth: 99 countries, 1991-2007," NBER Working Papers 17228, National Bureau of Economic Research, Inc.
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