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The Simple Analytics of Sudden Stops

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  • Peter Montiel

Abstract

Currency crises in emerging and developing countries have often been characterized by “sudden stops” of capital flows. A variety of mechanisms have been adduced to explain the emergence of this phenomenon. This paper integrates these mechanisms into a simple and transparent analytical model in which currency mismatches, large current account deficits, and large stocks of short-term debt interact with low reserve stocks to generate dual equilibria. In this context, the “panic” equilibrium is characterized by a currency crisis, a sudden stop, and an output collapse. The potential for various policies to avoid this outcome is explored, as are the implications of the analysis for reserve accumulation. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • Peter Montiel, 2013. "The Simple Analytics of Sudden Stops," Open Economies Review, Springer, vol. 24(2), pages 267-281, April.
    • Handle: RePEc:kap:openec:v:24:y:2013:i:2:p:267-281
    DOI: 10.1007/s11079-012-9241-9
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    1. Ricardo Caballero & Arvind Krishnamurthy, 1998. "Emerging Market Crises: An Asset Markets Perspective," Working papers 98-18, Massachusetts Institute of Technology (MIT), Department of Economics.
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    14. Pablo E. Guidotti & Federico Sturzenegger & Agustín Villar, 2004. "On the Consequences of Sudden Stops," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 171-214, January.
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    Cited by:

    1. Levan Efremidze & John Rutledge & Thomas D. Willett, 2016. "Capital Flow Surges As Bubbles: Behavioral Finance And Mckinnon’S Over-Borrowing Syndrome Extended," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(02), pages 1-27, June.
    2. Seung-Gwan Baek & Chi-Young Song, 2016. "On the Determinants of Surges and Stops in Foreign Loans: An Empirical Investigation," Open Economies Review, Springer, vol. 27(3), pages 405-445, July.
    3. Levan Efremidze & Sungsoo Kim & Ozan Sula & Thomas D. Willett, 2017. "The relationships among capital flow surges, reversals and sudden stops," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 9(4), pages 393-413, November.
    4. Yu-Fu Chen & Michael Funke, 2017. "Greece’s Three-Act Tragedy: A Simple Model of Grexit vs. Staying Afloat inside the Single Currency Area," Open Economies Review, Springer, vol. 28(2), pages 297-318, April.

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    More about this item

    Keywords

    Currency crises; Mismatches; Multiple equilibria; Sudden stops; F32; F41;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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