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Smoothing sudden stops

  • Caballero, Ricardo J.
  • Krishnamurthy, Arvind

Emerging economies are exposed to severe and sudden shortages of international financial resources. Yet domestic agents seem not to undertake enough precautions against these sudden stops. Following our previous work, we highlight in this paper the central role played by limited domestic development in ex-ante (insurance) and ex-post (spot) financial markets in generating this collective undervaluation of external resources and insurance. Within this structure, this paper studies several canonical policies to counteract the external underinsurance. We do this by first solving for the optimal mechanism given the constraints imposed by limited domestic financial development, and then considering the main - in terms of the model and practical relevance - implementations of this mechanism.

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 119 (2004)
Issue (Month): 1 (November)
Pages: 104-127

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Handle: RePEc:eee:jetheo:v:119:y:2004:i:1:p:104-127
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. Alberto Bisin & Adriano Rampini, 2006. "Exclusive contracts and the institution of bankruptcy," Economic Theory, Springer, vol. 27(2), pages 277-304, January.
  2. Ricardo J. Caballero & Arvind Krishnamurthy, 2000. "International Liquidity Management: Sterilization Policy in Illiquid Financial Markets," NBER Working Papers 7740, National Bureau of Economic Research, Inc.
  3. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sérgio, 1999. "Hedging and Financial Fragility in Fixed Exchange Rate Regimes," CEPR Discussion Papers 2171, C.E.P.R. Discussion Papers.
  4. Holmstrom, B & Tirole, J, 1996. "Private and Public Supply of Liquidity," Working papers 96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Ricardo J. Caballero & Arvind Krishnamurthy, 2001. "International Liquidity Illusion: On the Risks of Sterilization," NBER Working Papers 8141, National Bureau of Economic Research, Inc.
  6. Ricardo Caballero & Arvind Krishnamurthy, 2000. "International and Domestic Collateral Constraints in a Model of Emerging Market Crises," NBER Working Papers 7971, National Bureau of Economic Research, Inc.
  7. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-88, May.
  8. Atkeson, Andrew & Lucas, Robert E, Jr, 1992. "On Efficient Distribution with Private Information," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 427-53, July.
  9. Ricardo J. Caballero & Arvind Krishnamurthy, 2000. "Dollarization of Liabilities: Underinsurance and Domestic Financial Underdevelopment," NBER Working Papers 7792, National Bureau of Economic Research, Inc.
  10. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  11. Ricardo Caballero & Arvind Krishnamurthy, 2001. "A "Vertical" Analysis of Crises and Intervention: Fear of Floating and Ex-ante Problems," NBER Working Papers 8428, National Bureau of Economic Research, Inc.
  12. Frederic S. Mishkin & Andrew Crockett & Michael P. Dooley & Montek S. Ahluwalia, 2003. "Financial Policies," NBER Chapters, in: Economic and Financial Crises in Emerging Market Economies, pages 93-154 National Bureau of Economic Research, Inc.
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