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Sudden Stops and Twin Crises

Sudden Stops and Twin Crises. Michael Hutchison and Ilan Noy. Sudden Stops ?.

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Sudden Stops and Twin Crises

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  1. Sudden Stops and Twin Crises Michael Hutchison and Ilan Noy

  2. Sudden Stops? “In particular, I will…discuss the mechanics of a sudden stop in capital inflows (it need not result in capital outflows), and show that this could have large deleterious effects on the economy, validating the pessimistic conjectures that likely led to the initial stop.” (Calvo, 1998, p. 36)

  3. Mexican Waves

  4. Motivation • Currency Crises Frequent • Output Effects • Examples • Previous research • Typology of currency crises • Calvo’s sudden stop syndrome

  5. Objective. • Estimates of average output costs of currency crises - within a panel framework • Determine effect of Sudden Stops - which are sharp capital account reversals at the same time a country is facing a currency crisis • Were the consequences of the infamous crises of the 90s that surprising?

  6. Literature - Theory. • 1st and 2nd generations crisis models: no well-defined output effects. • 3rd generation assume incomplete markets, incentive problems or informational asymmetries (might include output effects). • The Sudden Stop syndrome (Calvo, 98). • Additional papers on capital flow reversals and financial crises • Earlier literature on credit constraints and the financial accelerator.

  7.  Methodology • Estimate of output loss in the context of a dynamic model of output growth yit= αyit-1+ xit + γDit + it+ ui • Dynamic panel estimates with endogeneity: • Why Panel framework? • Hausman-Taylor IV estimator • Arellano-Bond GMM estimator

  8. Hausman-Taylor IV estimator • A weighted FGLS with IVs (deviations from country specific means). • Estimated variances are obtained from the LS fixed effects regression and a 2SLS procedure. • Specifying endogenous/exogenous variables • the crises variables are assumed endogenous

  9. Forecasts

  10. Sudden Stops

  11. More Robustness… • Major currency crises / banking crises • Major capital flow reversals • Selection bias (IMR) • Including reserves in the identification of reversals • Currency crisis identification using only the RER • Out-of-sample predictions

  12. Out-of-sample Asia 1998

  13. Recent Sudden Stops

  14. Sudden Stop ModelEstimated Dynamics

  15. Calvo (1998, p. 47): “High negative swings in capital inflows – i.e., sudden stops – are dangerous.”

  16. Policy…and future research • Leading indicators • Chile and Dr. Mahathir against the Washington Consensus? • Caballero’s insured capital flows? • Liberalizing financial markets? • What to do after-the-fact?

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