TY  - JOUR
AU  - Caballero,Ricardo
AU  - Cowan,Kevin
AU  - Kearns,Jonathan
TI  - Fear of Sudden Stops: Lessons from Australia and Chile
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10519
PY  - 2004
Y2  - May 2004
UR  - http://www.nber.org/papers/w10519
L1  - http://www.nber.org/papers/w10519.pdf
N1  - Author contact info:
Ricardo J. Caballero
MIT
Department of Economics
Room E52-373a
Cambridge, MA 02142-1347
Tel: 617/253-0489
Fax: 617/253-6915
E-Mail: caball@mit.edu

Kevin Cowan
Central Bank of Chile
Agustinas 1180
Santiago
Chile
Tel: (562) 6702192
E-Mail: kcowan@bcentral.cl

Jonathan Kearns
E-Mail: kearnsj@rba.gov.au
AB  - Latin American economies are exposed to substantial external vulnerability. Domestic imbalances and terms of trade shocks are often exacerbated by sudden stops of capital inflow. In this paper we explore ways of overcoming external vulnerability, drawing lessons from a detailed comparison of the response of Chile and Australia to recent external shocks and from Australia's historical experience. We argue that in order to understand sudden stops and the mechanisms to smooth them, it is useful to identify and then distinguish between two inter-related dimensions of investors' confidence: country-trust and currency-trust. Lack of country-trust is a more fundamental and serious problem behind sudden stops. But lack of currency-trust may both be a source of country-trust problems and weaken a country's ability to deal with sudden stops. We discuss steps to improve along these two dimensions of investors' confidence in the medium run, and policies to reduce the impact of country-trust and currency-trust weaknesses in the short run.
ER  -