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Capital Flow Reversals, Sudden Stops, and International Reserve Adequacy: Further Evidence From the Global Financial Crisis

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  • Levan Efremidze
  • Ozan Sula
  • Thomas Willett

Abstract

Using a dataset of 39 emerging markets, we examined the role of international reserves during currency and capital flow crises. Our analysis revealed that higher levels of reserves are associated with lower intensity crises where intensity is measured by the magnitude of the change in exchange market pressure (EMP) or size of capital flow reversals. We also find evidence for the cushioning effects of reserves during the crises. When used against capital flow reversals, reserves can help mitigate the negative output effects of the crisis. Finally, our findings show that reserve adequacy should be evaluated based on the nature of the potential crisis. Policy makers may prefer to refrain from using reserves if export competitiveness is more important than potential balance sheet effects of currency depreciation.

Suggested Citation

  • Levan Efremidze & Ozan Sula & Thomas Willett, 2019. "Capital Flow Reversals, Sudden Stops, and International Reserve Adequacy: Further Evidence From the Global Financial Crisis," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 10(1), pages 52-67, January.
  • Handle: RePEc:jfr:ijfr11:v:10:y:2019:i:1:p:52-67
    DOI: 10.5430/ijfr.v10n1p52
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    References listed on IDEAS

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