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Output Growth, Capital Flow Reversals and Sudden stop Crises

  • Saubhik Deb

    ()

    (Department of Economics)

This paper studies the effects of capital flow reversals and sudden stop crises on output growth and how these effects vary across regions and between emerging and industrial countries. We found that capital flow reversals are generally contractionary in the developing countries and particularly in Asia and Africa. But neither capital flow reversals nor sudden stop crises have any significant growth effect in the industrial countries. Our initial estimates for sudden stop crises support the widely held belief regarding the contractionary nature of such crises. Further robustness checks indicate that the estimated negative growth effects for such crises are mainly driven by the presence of the Asian countries in the sample. Moreover, when the turbulent years of the East Asian crises are excluded from the sample, no significant effect of sudden stop crises could be found. Our research reconfirms the contractionary nature of capital flow reversals in developing countries but raises doubt about the existence of contractionary sudden stop crises.

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Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 200606.

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Length: 20 pages
Date of creation: 06 Apr 2006
Date of revision:
Handle: RePEc:rut:rutres:200606
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  1. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 35-54, November.
  2. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  3. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
  4. Don Harding & Adrian Pagan, 2000. "Disecting the Cycle: A Methodological Investigation," Econometric Society World Congress 2000 Contributed Papers 1164, Econometric Society.
  5. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
  6. V.V. Chari & Patrick Kehoe & Ellen R. McGrattan, 2005. "Sudden Stops and Output Drops," NBER Working Papers 11133, National Bureau of Economic Research, Inc.
  7. Harding, Don, 1997. "The Definition, Dating and Duration of Cycles," MPRA Paper 3357, University Library of Munich, Germany.
  8. Hutchison, Michael M. & Noy, Ilan, 2004. "Sudden Stops and the Mexican Wave: Currency Crises, Capital Flow Reversals and Output Loss in Emerging Markets," Santa Cruz Center for International Economics, Working Paper Series qt38j2b036, Center for International Economics, UC Santa Cruz.
  9. Enrique G. Mendoza & Katherine A. Smith, 2002. "Margin Calls, Trading Costs, and Asset Prices in Emerging Markets: The Finanical Mechanics of the 'Sudden Stop' Phenomenon," NBER Working Papers 9286, National Bureau of Economic Research, Inc.
  10. Edward J. Kane & Tara Rice, 2000. "Bank Runs and Banking Policies: Lessons for African Policymakers," NBER Working Papers 8003, National Bureau of Economic Research, Inc.
  11. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  12. 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.
  13. Robert J. Barro, 1995. "Inflation and Economic Growth," NBER Working Papers 5326, National Bureau of Economic Research, Inc.
  14. Enrique G. Mendoza, 2002. "Credit, Prices, and Crashes: Business Cycles with a Sudden Stop," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 335-392 National Bureau of Economic Research, Inc.
  15. Graciela L. Kaminsky, 2003. "Varieties of Currency Crises," NBER Working Papers 10193, National Bureau of Economic Research, Inc.
  16. Ricardo Caballero & Arvind Krishnamurthy, 2000. "International and Domestic Collateral Constraints in a Model of Emerging Market Crises," NBER Working Papers 7971, National Bureau of Economic Research, Inc.
  17. Sebastian Edwards, 2004. "Thirty Years of Current Account Imbalances, Current Account Reversals and Sudden Stops," NBER Working Papers 10276, National Bureau of Economic Research, Inc.
  18. Girton, Lance & Roper, Don, 1977. "A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience," American Economic Review, American Economic Association, vol. 67(4), pages 537-48, September.
  19. Ratna Sahay & Deepak Mishra & Poonam Gupta, 2003. "Output Response to Currency Crises," IMF Working Papers 03/230, International Monetary Fund.
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