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Sudden Stops in Capital Inflows and the Design of Exchange Rate Regimes

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  • Ritter, Raymond

Abstract

A two sector small open economy model developed by Corden (1991, 2002) is used to analyse the impact of sudden stops in capital inflows on an internal and external equilibrium and to explore the merits of disposing of the nominal exchange rate as policy tool in rectifying real exchange rate misalignments. It is shown how the economy's sectoral demand properties determine the extent of recession associated with real exchange rate adjustment that is neither engineered by nominal exchange rate changes nor brought about by a decline in nontraded goods prices. The conclusion is drawn that, when deciding on the design of exchange rate regimes, the structural characteristics of the economy ought to be considered so as to appropriately strengthen its capacity to cope with shocks in the form of negative swings in capital inflows.

Suggested Citation

  • Ritter, Raymond, 2003. "Sudden Stops in Capital Inflows and the Design of Exchange Rate Regimes," Discussion Paper Series 26317, Hamburg Institute of International Economics.
  • Handle: RePEc:ags:hwwadp:26317
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    File URL: http://ageconsearch.umn.edu/record/26317/files/dp030213.pdf
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    References listed on IDEAS

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    1. Leslie Lipschitz & Alex Mourmouras & Timothy D. Lane, 2002. "Capital Flows to Transition Economies; Master or Servant?," IMF Working Papers 02/11, International Monetary Fund.
    2. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 1, pages 35-54, November.
    3. Edwards, Sebastian, 2002. "The great exchange rate debate after Argentina," The North American Journal of Economics and Finance, Elsevier, vol. 13(3), pages 237-252, December.
    4. Andrea Bubula & Inci Ötker, 2002. "The Evolution of Exchange Rate Regimes Since 1990; Evidence From De Facto Policies," IMF Working Papers 02/155, International Monetary Fund.
    5. Sebastian Edwards, 2001. "Exchange Rate Regimes, Capital Flows and Crisis Prevention," NBER Working Papers 8529, National Bureau of Economic Research, Inc.
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    Keywords

    Financial Economics;

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