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Sudden Stops in Capital Inflows and the Design of Exchange Rate Regimes

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  • Ritter, Raymond

Abstract

A two sector small open economy model developed by Corden (1991, 2002) is used to analyse the impact of sudden stops in capital inflows on an internal and external equilibrium and to explore the merits of disposing of the nominal exchange rate as policy tool in rectifying real exchange rate misalignments. It is shown how the economy's sectoral demand properties determine the extent of recession associated with real exchange rate adjustment that is neither engineered by nominal exchange rate changes nor brought about by a decline in nontraded goods prices. The conclusion is drawn that, when deciding on the design of exchange rate regimes, the structural characteristics of the economy ought to be considered so as to appropriately strengthen its capacity to cope with shocks in the form of negative swings in capital inflows.

Suggested Citation

  • Ritter, Raymond, 2003. "Sudden Stops in Capital Inflows and the Design of Exchange Rate Regimes," HWWA Discussion Papers 213, Hamburg Institute of International Economics (HWWA).
    • Handle: RePEc:zbw:hwwadp:26317
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    References listed on IDEAS

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    1. Alejandro Izquierdo & Ernesto Talvi & Guillermo A. Calvo, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons," Research Department Publications 4299, Inter-American Development Bank, Research Department.
    2. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
    3. Siebert, Horst, 2002. "An iron law of currency crisis: the divergence of the nominal and the real exchange rate and increasing current account deficits," Kiel Working Papers 1106, Kiel Institute for the World Economy (IfW Kiel).
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    5. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 1, pages 35-54, November.
    6. Mr. Leslie Lipschitz & Mr. Alex Mourmouras & Mr. Timothy D. Lane, 2002. "Capital Flows to Transition Economies: Master or Servant?," IMF Working Papers 2002/011, International Monetary Fund.
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    More about this item

    Keywords

    capital inflows; sudden stops; real exchange rate adjustment; exchange rate regimes;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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