Systemic%20Sudden%20Stops%3A%20The%20Relevance%20of%20Balance%2DSheet%20Effects%20and%20Financial%20Integration

Working Papers

Systemic Sudden Stops: The Relevance of Balance-Sheet Effects and Financial Integration


CODE: WP-637
AUTHOR(s): Calvo, Guillermo A. , Izquierdo, Alejandro , Mejía, Luis Fernando
PUBLISHED: July 2008
LANGUAGE: English
RELATED TOPICS: Finance
DOWNLOAD FILE IN: English

Abstract:

Using a sample of 110 developed and developing countries for the period 1990-2004, this paper analyzes the characteristics of systemic sudden stops (3S) in capital flows and the relevance of balance-sheet effects in the likelihood of their materialization. A small supply of tradable goods relative to their domestic absorption?a proxy for potential changes in the real exchange rate?and large foreign-exchange denominated debts towards the domestic banking system are claimed to be key determinants of the probability of 3S, producing a balancesheet effect with non-linear impacts on the probability of 3S. While financial integration is up to a point associated with a higher likelihood of 3S, beyond that point financial integration is associated with a lower likelihood of 3S.

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