TY  - JOUR
AU  - Calvo,Guillermo A.
AU  - Izquierdo,Alejandro
AU  - Mejia,Luis-Fernando
TI  - On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10520
PY  - 2004
Y2  - May 2004
UR  - http://www.nber.org/papers/w10520
L1  - http://www.nber.org/papers/w10520.pdf
N1  - Author contact info:
Guillermo A. Calvo
Columbia University
School of International and Public Affairs
420 West 118th St, Room 1303B
MC3332
New York, NY 10027
Tel: 212/854-4264
E-Mail: gc2286@columbia.edu

Alejandro Izquierdo
Inter-American Development Bank
1300 New York Ave, N. W.
Washington, D. C., 20577
E-Mail: alejandroi@iadb.org

Luis-Fernando Mejía
University of Chicago
Department of Economics
1126 East 59th Street
Chicago, IL 60637
E-Mail: lfmejia@uchicago.edu
AB  - Using a sample of 32 developed and developing countries we analyze the empirical characteristics of sudden stops in capital flows and the relevance of balance sheet effects in the likelihood of their materialization. We find that large real exchange rate (RER) fluctuations coming hand in hand with Sudden Stops are basically an emerging market (EM) phenomenon. Sudden Stops seem to come in bunches, grouping together countries that are different in many respects. However, countries are similar in that they remain vulnerable to large RER fluctuations – be it because they could be forced to large adjustments in the absorption of tradable goods, and/or because the size of dollar liabilities in the banking system (i.e., domestic liability dollarization, or DLD) is high. Openness, understood as a large supply of tradable goods that reduces leverage over the current account deficit, coupled with DLD, are key determinants of the probability of Sudden Stops. The relationship between Openness and DLD in the determination of the probability of Sudden Stops is highly non-linear, implying that the interaction of high current account leverage and high dollarization may be a dangerous cocktail.
ER  -