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Lending Booms, Sharp Reversals and Real Exchange Rate Dynamics

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  • Gopinath, Gita

Abstract

Emerging markets in the 1990s experienced periods of booms followed by collapses in gross domestic product, consumption, traded and non-traded sector output and real exchange rate movements alongside unprecedented movements in foreign investor participation in these economies. An important feature of these episodes is the asymmetry in the pattern of booms and collapses. We introduce a natural search friction into the foreign investment decision in a small open economy and demonstrate that this can generate the asymmetry observed in the data. The magnitude of the reversals predicted by the model can be quantitatively large and empirically relevant.

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  • Gopinath, Gita, 2003. "Lending Booms, Sharp Reversals and Real Exchange Rate Dynamics," Scholarly Articles 11988005, Harvard University Department of Economics.
  • Handle: RePEc:hrv:faseco:11988005
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    Cited by:

    1. Mendoza, Enrique G. & Smith, Katherine A., 2006. "Quantitative implications of a debt-deflation theory of Sudden Stops and asset prices," Journal of International Economics, Elsevier, vol. 70(1), pages 82-114, September.
    2. Enrique G. Mendoza, 2008. "Sudden stops, financial crises and leverage: a Fisherian deflation of Tobin's Q," International Finance Discussion Papers 960, Board of Governors of the Federal Reserve System (U.S.).
    3. Enrique G. Mendoza, 2005. "Sudden Stops in an Equilibrium Business Cycle Model with Credit Constraints: A Fisherian Deflation of Tobin's Q," 2005 Meeting Papers 307, Society for Economic Dynamics.

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