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Explaining Sudden Stops, Growth Collapse and BOP Crises: The Case of Distortionary Output Taxes

  • Guillermo A. Calvo

The paper discusses a model in which growth is a negative function of fiscal burden. Moreover, growth discontinuously switches from high to low as fiscal burden reaches a critical level. Growth collapse is associated with a Sudden Stop of capital inflows, real depreciation and a drop in output (driven by a fall in the output of nontradables)-all of which have occurred during recent financial crises in Emerging Markets. The monetary version of the model is employed to show that BOP crises could be a result of fiscal distortions. In particular, it is further argued that BOP crisis could be a justifiable central bank response to growth collapse, although realistic circumstances may make this response highly ineffective. An important policy implication of the model is that in order to avoid Sudden Stop crises, policymakers should aim at improving fiscal institutions. Lowering the fiscal deficit is highly effective in the medium term

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File URL: http://www.nber.org/papers/w9864.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9864.

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Date of creation: Jul 2003
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Publication status: published as Calvo, Guillermo. Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy? Cambridge, MA: MIT Press, 2005.
Handle: RePEc:nbr:nberwo:9864
Note: IFM
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Web page: http://www.nber.org
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  1. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 513-548, December.
  2. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fixing for Your Life," NBER Working Papers 8006, National Bureau of Economic Research, Inc.
  3. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
  4. Calvo, Guillermo A, 1987. "Balance of Payments Crises in a Cash-in-Advance Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 19-32, February.
  5. Ricardo J. Caballero & Arvind Krishnamurthy, 2003. "Excessive Dollar Debt: Financial Development and Underinsurance," Journal of Finance, American Finance Association, vol. 58(2), pages 867-894, 04.
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