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Sudden Stops and Currency Drops: A Historical Look

In: The Decline of Latin American Economies: Growth, Institutions, and Crises

  • Luis A. V. Catão

This paper shows that recent manifestations of sudden stops (SSs) in international capital flows have striking parallels in the early financial globalization era preceding World War I. All main capital-importing countries then faced episodic capital flow reversals averaging some 5 percent of GDP and with a median duration of four years. Most SSs also displayed striking crosscountry synchronization, being immediately preceded by rising world interest rates. Both fixed and floating exchange rate regimes were hit, with no significant differences between them. Yet, not all SSs resulted in currency drops: while some countries experienced currency collapses, others managed to preserve exchange rate stability. These different responses are related to domestic "frictions" that heightened the procyclicality of absorption and hindered precautionary reserve accumulation in some countries relative to others.

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This chapter was published in:
  • Sebastian Edwards & Gerardo Esquivel & Graciela Márquez, 2007. "The Decline of Latin American Economies: Growth, Institutions, and Crises," NBER Books, National Bureau of Economic Research, Inc, number edwa04-1, October.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10658.
    Handle: RePEc:nbr:nberch:10658
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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