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

Peer Reviewed icon Peer Reviewed
Date issued
Jul 2008
Subject
Financial Crisis and Structural Adjustement;
Financial Sector
JEL code
F31 - Foreign Exchange;
F32 - Current Account Adjustment • Short-Term Capital Movements;
F34 - International Lending and Debt Problems;
F41 - Open Economy Macroeconomics
Category
Working Papers
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.