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Sudden stops and financial frictions : evidence from industry level data

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  • Cowan, Kevin
  • Raddatz, Claudio

Abstract

The 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 Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5605.

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Date of creation: 01 Mar 2011
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Handle: RePEc:wbk:wbrwps:5605

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Related research

Keywords: Debt Markets; Emerging Markets; Access to Finance; Currencies and Exchange Rates; Economic Theory&Research;

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Cited by:
  1. 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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