Systemic Sudden Stops: The Relevance Of Balance-Sheet Effects And Financial Integration (2008)
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BibTeX
@MISC{Calvo08systemicsudden,
author = {Guillermo A. Calvo and Alejandro Izquierdo and Luis-Fernando Mejía},
title = { Systemic Sudden Stops: The Relevance Of Balance-Sheet Effects And Financial Integration},
year = {2008}
}
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Abstract
JEL No. F31,F32,F34,F41 Using a sample of 110 developed and developing countries for the period 1990-2004 we analyze the empirical characteristics of systemic sudden stops (3S) in capital flows--understood as large and largely unexpected capital account contractions that occur in periods of systemic turmoil-- and the relevance of balance sheet effects in the likelihood of their materialization. We conjecture that large real exchange rate (RER) fluctuations come hand in hand with 3S. 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, denoted Domestic Liability Dollarization, DLD, are claimed to be key determinants of the probability of 3S, conforming a balance-sheet effect that impacts on the probability of 3S in non-linear fashion. Regarding financial integration, the larger is the latter, the larger is likely to be the probability of Sudden Stop; however, beyond a critical point
Keyphrases
balance-sheet effect financial integration systemic sudden stop full credit sudden stop critical point domestic liability dollarization small supply large foreign-exchange large real exchange rate balance sheet effect unexpected capital account contraction domestic banking system non-linear fashion tradable good systemic turmoil key determinant potential change domestic absorption real exchange rate empirical characteristic capital flow
