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Sudden Stops and Output Drops

Author

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  • Patrick J. Kehoe
  • Ellen R. McGrattan

Abstract

In recent financial crises and in recent theoretical studies of them, abrupt declines in capital inflows, or sudden stops, have been linked with large drops in output. Do sudden stops cause output drops? No, according to a standard equilibrium model in which sudden stops are generated by an abrupt tightening of a country?s collateral constraint on foreign borrowing. In this model, in fact, sudden stops lead to output increases, not decreases. An examination of the quantitative effects of a well-known sudden stop, in Mexico in the mid-1990s, confirms that a drop in output accompanying a sudden stop cannot be accounted for by the sudden stop alone. To generate an output drop during a financial crisis, as other studies have done, the model must include other economic frictions which have negative effects on output large enough to overwhelm the positive effect of the sudden stop.
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Suggested Citation

  • Patrick J. Kehoe & Ellen R. McGrattan, 2005. "Sudden Stops and Output Drops," American Economic Review, American Economic Association, vol. 95(2), pages 381-387, May.
  • Handle: RePEc:aea:aecrev:v:95:y:2005:i:2:p:381-387
    Note: DOI: 10.1257/000282805774670013
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    References listed on IDEAS

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    1. Aiyagari, S. Rao & Christiano, Lawrence J. & Eichenbaum, Martin, 1992. "The output, employment, and interest rate effects of government consumption," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 73-86, October.
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    7. Patrick J. Kehoe & Ellen R. McGrattan, 2005. "Sudden Stops and Output Drops," American Economic Review, American Economic Association, vol. 95(2), pages 381-387, May.
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    More about this item

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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