Sudden Stops, Sectoral Reallocations, and the Real Exchange Rate
A sudden stop of capital flows into a developing country tends to be followed by a rapid switch from trade deficits to surpluses, a depreciation of the real exchange rate, and decreases in output and total factor productivity. Substantial reallocation takes place from the nontraded sector to the traded sector. We construct a multisector growth model, calibrate it to the Mexican economy, and use it to analyze Mexico's 1994-95 crisis. When subjected to a sudden stop, the model accounts for the trade balance reversal and the real exchange rate depreciation, but it cannot account for the decreases in GDP and TFP. Extending the model to include labor frictions and variable capital utilization, we still find that it cannot quantitatively account for the dynamics of output and productivity without losing the ability to account for the movements of other variables.
-
-
Copy CitationTimothy J. Kehoe and Kim J. Ruhl, "Sudden Stops, Sectoral Reallocations, and the Real Exchange Rate," NBER Working Paper 14395 (2008), https://doi.org/10.3386/w14395.Download Citation
Published Versions
Kehoe, Timothy J. & Ruhl, Kim J., 2009.
"Sudden stops, sectoral reallocations, and the real exchange rate,"
Journal of Development Economics,
Elsevier, vol. 89(2), pages 235-249, July.
citation courtesy of 
More from the NBER
In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Health, and the Bulletin on Entrepreneurship — as well as online conference reports, video lectures, and interviews.
