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External Finance, Sudden Stops, and Financial Crisis; What is Different This Time?

  • F. Gulcin Ozkan
  • Filiz D Unsal

This paper develops a two-country DSGE model to investigate the transmission of a global financial crisis to a small open economy. We find that economies hit by a sudden stop arising from financial distress in the global economy are likely to face a more prolonged crisis than sudden stop episodes of domestic origin. Moreover, in contrast to the existing literature, our results suggest that the greater a country's trade integration with the rest of the world, the greater the response of its macroeconomic aggregates to a sudden stop of capital flows.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/158.

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Length: 34
Date of creation: 01 Jul 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/158
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