TY - JOUR AU - Chari,V.V. AU - Kehoe,Patrick AU - McGrattan,Ellen R. TI - Sudden Stops and Output Drops JF - National Bureau of Economic Research Working Paper Series VL - No. 11133 PY - 2005 Y2 - February 2005 UR - http://www.nber.org/papers/w11133 L1 - http://www.nber.org/papers/w11133.pdf N1 - Author contact info: Varadarajan V. Chari Department of Economics University of Minnesota 1035 Heller Hall 271 - 19th Avenue South Minneapolis, MN 55455 Tel: 612/626-5171 Fax: (612) 624-0209 E-Mail: varadarajanvchari@gmail.com Patrick Kehoe Research Department Federal Reserve Bank of Minneapolis 90 Hennepin Avenue Minneapolis, MN 55480-0291 Tel: 612/204-5525 Fax: 612/204-5515 E-Mail: pkehoe@res.mpls.frb.fed.us Ellen McGrattan Research Department Federal Reserve Bank of Minneapolis 90 Hennepin Avenue Minneapolis, MN 55480 Tel: 612/204-5523 Fax: 612/204-5515 E-Mail: erm@mcgrattan.mpls.frb.fed.us AB - In recent financial crises and in recent theoretical studies of them, abrupt declines in capital inflows, or sudden stops, have been linked with large drops in output. Do sudden stops cause output drops? No, according to a standard equilibrium model in which sudden stops are generated by an abrupt tightening of a country's collateral constraint on foreign borrowing. In this model, in fact, sudden stops lead to output increases, not decreases. An examination of the quantitative effects of a well-known sudden stop, in Mexico in the mid-1990s, confirms that a drop in output accompanying a sudden stop cannot be accounted for by the sudden stop alone. To generate an output drop during a financial crisis, as other studies have done, the model must include other economic frictions which have negative effects on output large enough to overwhelm the positive effect of the sudden stop. ER -