The sudden stops of debt‐led capital inflows, credit crunch, and exchange rate regimes

This paper investigates what factors affect the duration of sudden stops in capital flows using quarterly data for a large panel of countries. We find that countries with floating exchange rate regimes tend to experience shorter sudden stop episodes and that fixed exchange rate regimes are associated with longer periods of low output growth following sudden stops. These effects are quantitatively large: having a flexible exchange rate regime increases the probability of exiting the sudden stop state by between 50 to 80 percent. Flexible exchange rate regimes significantly shorten the duration of output decelerations following sudden stops by over 30 percent. Positive variations in terms of trade also abbreviate the duration of sudden stops. In terms of policies, identification is trickier, but the evidence suggests that monetary policy tightening shortens the duration of sudden stops. Changes in capital account restrictions do not seem to matter.

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Capital inflows, Current Accounts, and Exchange Rate Regimes in Central East Europe during and after the Global Financial Crisis

Review of Economics ◽

10.1515/roe-2011-0104 ◽

2011 ◽

Vol 62 (1) ◽

Author(s):

Horst Brezinski ◽

Johannes Stephan

Keyword(s):

Exchange Rate ◽

Financial Crisis ◽

Current Account ◽

Foreign Currency ◽

Global Financial Crisis ◽

Exchange Rate Regimes ◽

Flexible Exchange Rate ◽

Capital Inflows ◽

East Europe ◽

The Global Financial Crisis

SummaryThis contribution is concerned with the real economy effects of the current global crisis in Central East Europe. It analyses the way that the global financial crisis has transmitted into Central East Europe (contagion) by focussing on the drying up of capital inflows (in particular foreign direct investment), the worsening of current account imbalances, the role of the exchange rate regimes, and of increasing foreign currency borrowing during the years before the crisis. The analysis shows that the growth and development model of the region, which featured current account deficits financed by capital inflows, served as an accelerator for the adverse effects of contagion in Central East Europe. Countries with a fixed exchange rate to the euro proved to be the countries in the region hit hardest, whereas a flexible exchange rate appears to have acted as a shield against contagion. This casts doubts on the preferability of the planned rapid adoption of the euro in some of the countries in Central East Europe.

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Systemic Sudden Stops: Crises and Recoveries in EMs

Macroeconomics in Times of Liquidity Crises ◽

10.7551/mitpress/9780262035415.003.0007 ◽

2016 ◽

Author(s):

Guillermo Calvo ◽

Pablo Ottonello

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Economic Activity ◽

Capital Inflows ◽

Consumption Smoothing ◽

Sudden Stops ◽

Bank Credit ◽

Real Wages ◽

Stylized Facts ◽

Central Topic

The chapter presents stylized facts about recession episodes associated with Systemic Sudden Stops (3S), i.e., large and abrupt reversals in capital inflows in which several economies are hit at about the same time. This choice is motivated by the conjecture that 3S are mostly triggered by liquidity malfunction, which is a central topic of the book. The chapter documents that the contraction of economic activity during 3S recession episodes is mostly driven by measured TFP, and is accompanied by a collapse in bank credit, investment, little consumption smoothing, and a large adjustments of real wages and the real exchange rate. The recovery from these episode occurs with a precarious recovery of credit (“Phoenix Miracles”) and displays persistent effects on economic activity, investment, and real wages.

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