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Financial Diversification, Sudden Stops, and Sudden Starts

In: Current Account and External Financing

Author

Listed:
  • Kevin Cowan

    (Banco Central de Chile)

  • José De Gregorio

    (Banco Central de Chile)

  • Alejandro Micco

    (Ministerio de Hacienda, Gobierno de Chile)

  • Christopher Neilson

    (Yale University)

Abstract

The recent literature on sudden stops is based on the fact that many emerging market economies experience recurrent and sharp capital account reversals. In this paper we argue, as some recent research has started to emphasize, that more information can be obtained by looking at gross rather than net flows. Economies may be curtailed from international financial markets, resulting in a sudden stop of inflows, but others may be experiencing portfolio shifts that cause sudden start of capital outflows. By looking at gross flows, and comparing emerging markets (EMEs) with developed economies (DEs) we indeed show that there is a variety of experiences that cannot be lumped together. In particular, sudden stop of inflows are as common in DEs as in EMEs, but a key difference is that in the former outflows and inflows are negatively correlated, which dampen the reversal of net flows. We present a model of financial diversification to interpret these results which is consistent with most evidence we report here. l II) could be helpful on this task.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Kevin Cowan & José De Gregorio & Alejandro Micco & Christopher Neilson, 2008. "Financial Diversification, Sudden Stops, and Sudden Starts," Central Banking, Analysis, and Economic Policies Book Series, in: Kevin Cowan & Sebastián Edwards & Rodrigo O. Valdés & Norman Loayza (Series Editor) & Klaus Schmidt- (ed.),Current Account and External Financing, edition 1, volume 12, chapter 5, pages 159-194, Central Bank of Chile.
  • Handle: RePEc:chb:bcchsb:v12c05pp159-194
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    References listed on IDEAS

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