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On the Consequences of Sudden Stops

Author

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  • Pablo E. Guidotti

    ()

  • Federico Sturzenegger

    ()

  • Agustín Villar

    ()

Abstract

Our analysis shows a number of interesting empirical regularities. First, when we apply a simple definition of sudden stops, we find that they have been a fairly common occurrence at least since the late 1970s. Second, economic performance after a sudden stop can differ dramatically across countries, depending on certain country characteristics. We show that open economies and those that choose a floating exchange rate regime after a crisis recover fairly quickly from the output contraction that usually comes with the sudden stop, whereas countries with liability dollarization recover more slowly. These characteristics relate to how the economies adjust exports and imports during the aftermath of a sudden stop. Open economies that do not show much liability dollarization tend to show higher export growth and less import contraction than highly dollarized economies. The paper is organized as follows. The next section discusses our definition of sudden stops. We then examine the stylized facts associated with sudden stops, including their regional coverage and evolution over time. A subsequent section proceeds to identify the key factors that explain the nature of the aftermath of a sudden stop in capital flows. If sudden stops remain a recurrent feature of emerging market economies in years to come, the issue of how to ensure a quick return of growth in the aftermath of a crisis will require attention. Policy recommendations focused on improving such ex post performance should go hand in hand with traditional prevention measures designed to avoid the crises. We elaborate on these conclusions in the final section.

Suggested Citation

  • Pablo E. Guidotti & Federico Sturzenegger & Agustín Villar, 2004. "On the Consequences of Sudden Stops," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Spring 20), pages 171-214, January.
  • Handle: RePEc:col:000425:008672
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    Keywords

    Sudden stops; economirc recovery; dollarization; adjustment mechanisms;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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