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From Sudden Stops to Fisherian Deflation: Quantitative Theory and Policy

Author

Listed:
  • Anton Korinek

    (Department of Economics, Johns Hopkins University, Baltimore, Maryland 21218
    National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Enrique G. Mendoza

    () (Department of Economics, University of Pennsylvania, Philadelphia, Pennsylvania 19104
    National Bureau of Economic Research, Cambridge, Massachusetts 02138)

Abstract

In the 1990s, Sudden Stops in emerging markets were a harbinger of the 2008 global financial crisis. During these Sudden Stops, countries lost access to credit, which caused abrupt current account reversals, and suffered severe recessions. This article reviews a class of models that yield quantitative predictions consistent with these observations, based on an occasionally binding credit constraint that limits debt to a fraction of the market value of incomes or assets used as collateral. Sudden Stops are infrequent events nested within regular business cycles and occur in response to standard shocks after periods of expansion increase leverage ratios sufficiently. When this happens, the Fisherian debt-deflation mechanism is set in motion, as lower asset or goods prices tighten the constraint further, causing further deflation. This framework also embodies a pecuniary externality with important implications for macroprudential policy because agents do not internalize how current borrowing decisions affect collateral values during future financial crises.

Suggested Citation

  • Anton Korinek & Enrique G. Mendoza, 2014. "From Sudden Stops to Fisherian Deflation: Quantitative Theory and Policy," Annual Review of Economics, Annual Reviews, vol. 6(1), pages 299-332, August.
  • Handle: RePEc:anr:reveco:v:6:y:2014:p:299-332
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-economics-080213-041005
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    Citations

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    Cited by:

    1. Korinek, Anton & Kreamer, Jonathan, 2014. "The redistributive effects of financial deregulation," Journal of Monetary Economics, Elsevier, vol. 68(S), pages 55-67.
    2. Javier Bianchi & Chenxin Liu & Enrique G. Mendoza, 2016. "Fundamentals News, Global Liquidity, and Macroprudential Policy," NBER Chapters,in: NBER International Seminar on Macroeconomics 2015 National Bureau of Economic Research, Inc.
    3. repec:ucp:macann:doi:10.1086/690239 is not listed on IDEAS
    4. repec:bis:bisbps:95 is not listed on IDEAS
    5. Pierre-Olivier Gourinchas & Thomas Philippon & Dimitri Vayanos, 2017. "The Analytics of the Greek Crisis," NBER Macroeconomics Annual, University of Chicago Press, vol. 31(1), pages 1-81.
    6. Beatrice D. Scheubel & Livio Stracca, 2016. "What Do We Know About the Global Financial Safety Net? A New Comprehensive Data Set," CESifo Working Paper Series 6184, CESifo Group Munich.
    7. Petroulakis, Filippos, 2017. "Internal devaluation in currency unions: the role of trade costs and taxes," Working Paper Series 2049, European Central Bank.
    8. Joaquin Blaum, 2018. "Global Firms in Large Devaluations," 2018 Meeting Papers 593, Society for Economic Dynamics.
    9. Lorenzo Menna & Martin Tobal, 2018. "Financial and price stability in emerging markets: the role of the interest rate," BIS Working Papers 717, Bank for International Settlements.
    10. Korinek, Anton & Sandri, Damiano, 2016. "Capital controls or macroprudential regulation?," Journal of International Economics, Elsevier, vol. 99(S1), pages 27-42.
    11. repec:eee:inecon:v:111:y:2018:i:c:p:61-80 is not listed on IDEAS
    12. Grant, Everett, 2016. "Exposure to international crises: trade vs. financial contagion," Globalization and Monetary Policy Institute Working Paper 280, Federal Reserve Bank of Dallas.
    13. Edd Denbee & Carsten Jung & Francesco Paternò, 2016. "Stitching together the global financial safety net," Questioni di Economia e Finanza (Occasional Papers) 322, Bank of Italy, Economic Research and International Relations Area.
    14. Franz Hamann & Jesús Bejarano & Diego Rodríguez, 2015. "Monetary policy implications for an oil-exporting economy of lower long-run international oil prices," Borradores de Economia 871, Banco de la Republica de Colombia.
    15. Ozge Akinci & Ryan Chahrour, 2014. "Good News is Bad News: Leverage Cycles and Sudden Stops," Boston College Working Papers in Economics 866, Boston College Department of Economics, revised 30 Apr 2015.
    16. Korinek, Anton, 2018. "Regulating capital flows to emerging markets: An externality view," Journal of International Economics, Elsevier, vol. 111(C), pages 61-80.
    17. Stracca, Livio & Scheubel, Beatrice, 2016. "What do we know about the global financial safety net? Rationale, data and possible evolution," Occasional Paper Series 177, European Central Bank.
    18. Eng, Yoke-Kee & Wong, Chin-Yoong, 2016. "Asymmetric growth effect of capital flows: Evidence and quantitative theory," Economic Systems, Elsevier, vol. 40(1), pages 64-81.
    19. Anton Korinek & Jonathan Kreamer, 2014. "The redistributive effects of financial deregulation: wall street versus main street," BIS Working Papers 468, Bank for International Settlements.
    20. Chin-Yoong Wong & Yoke-Kee Eng, 2015. "Surviving Asymmetry in Capital Flows and the Business Cycles: The Role of Prudential Capital Controls," Review of Development Economics, Wiley Blackwell, vol. 19(3), pages 545-563, August.
    21. repec:eee:ecolet:v:156:y:2017:i:c:p:114-117 is not listed on IDEAS
    22. Gourinchas, Pierre-Olivier & Philippon, Thomas & Vayanos, Dimitri, 2016. "The analytics of the Greek crisis: celebratory centenary issue," LSE Research Online Documents on Economics 67368, London School of Economics and Political Science, LSE Library.

    More about this item

    Keywords

    financial crises; balance sheet effects; pecuniary externalities; macroprudential regulation;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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