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External Finance, Sudden Stops, and Financial Crisis: What is Different This Time?

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  • Gülçin Özkan
  • Ms. Filiz D Unsal

Abstract

This paper develops a two-country DSGE model to investigate the transmission of a global financial crisis to a small open economy. We find that economies hit by a sudden stop arising from financial distress in the global economy are likely to face a more prolonged crisis than sudden stop episodes of domestic origin. Moreover, in contrast to the existing literature, our results suggest that the greater a country's trade integration with the rest of the world, the greater the response of its macroeconomic aggregates to a sudden stop of capital flows.

Suggested Citation

  • Gülçin Özkan & Ms. Filiz D Unsal, 2010. "External Finance, Sudden Stops, and Financial Crisis: What is Different This Time?," IMF Working Papers 2010/158, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2010/158
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    2. D. Filiz Unsal, 2013. "Capital Flows and Financial Stability: Monetary Policy and Macroprudential Responses," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 233-285, March.
    3. Mr. Selim A Elekdag & Mr. Harun Alp, 2011. "The Role of Monetary Policy in Turkey During the Global Financial Crisis," IMF Working Papers 2011/150, International Monetary Fund.

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    More about this item

    Keywords

    WP; financial crisis; risk premium; Sudden Stops; Financial Crises; Emerging Markets; capital goods; price level; production firm; net export; capital demand; domestic economy; economy variable; equilibrium mark-up; DSGE model; optimal contract; nominal price; price adjustment cost; Self-employment; Return on investment; Consumption; Currencies; Global;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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