TY  - JOUR
AU  - Kehoe,Timothy J.
AU  - Ruhl,Kim J.
TI  - Sudden Stops, Sectoral Reallocations, and the Real Exchange Rate
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14395
PY  - 2008
Y2  - October 2008
UR  - http://www.nber.org/papers/w14395
L1  - http://www.nber.org/papers/w14395.pdf
N1  - Author contact info:
Timothy J. Kehoe
University of Minnesota
Department of Economics
1925 Fourth Street South
Minneapolis, MN 55455-0462
Tel: 612/625-1589
Fax: 612/204-5515
E-Mail: tkehoe@umn.edu

Kim J. Ruhl
NYU Stern School of Business
Department of Economics
44 West Fourth Street, Suite 7-86
New York, NY 10012-1126
E-Mail: kruhl@stern.nyu.edu
AB  - 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.
ER  -