Sudden Flight and True Sudden Stops
We extend the sudden stops literature by allowing crisis episodes to be caused by either the retreat of global investors, as is assumed but not shown in the extant literature, or the sudden flight of local investors. We find that almost half of the previously defined sudden stops are actually episodes of sudden flight. Compared to sudden flight, true sudden stops are bunched and are associated with greater slowdowns in economic activity and sharper currency depreciations. We show that the empirical regularities of sudden flight and true sudden stops are consistent with theoretical models that incorporate gross capital flows and information asymmetries.
We thank Jillian Faucette for helpful assistance and comments. We also thank for helpful comments or conversations Rui Albuquerque, Ricardo Caballero, Jeff Frankel, Pierre-Olivier Gourinchas, Marc Lipson, Michael Schill, Martin Schneider, Eric van Wincoop, and seminar participants at Trinity College Dublin and Darden's Financial Economics Workshop. Warnock thanks the Darden School Foundation for generous support. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.