Cowan, KevinRaddatz, Claudio2012-03-192012-03-192011-03-01https://hdl.handle.net/10986/3371The nature of the microeconomic frictions that transform sudden stops in output collapses is not only of academic interest, but also crucial for the correct design of policy responses to prevent and address these episodes and the lack of evidence on this regard is an important shortcoming. This paper uses industry-level data in a sample of 45 developed and emerging countries and a differences-in-differences methodology to provide evidence of the role of financial frictions for the consequences of sudden stops. The results show that, consistently with financial frictions being important, industries that are more dependent on external finance decline significantly more during a sudden stop, especially in less financially developed countries. The results are robust to controlling for other possible mechanisms, including labor market frictions. The paper also provides results on the role of comparative advantage during sudden stops and on the usefulness of various policy responses to attenuate the consequences of these shocks.CC BY 3.0 IGOABSOLUTE VALUEACCESS TO FINANCEACCESS TO INTERNATIONAL FINANCIAL MARKETSASSET MARKETSASSET PRICESASSETSBALANCE SHEETBALANCE-SHEETBANKING SECTORBILLBORROWING CAPACITYBUSINESS CYCLEBUSINESS CYCLESCAPITAL ACCOUNTCAPITAL CONTROLSCAPITAL FLIGHTSCAPITAL FLOWCAPITAL FLOWSCAPITAL FLOWS REVERSALSCAPITAL INFLOWSCAPITAL INTENSITYCAPITAL INVESTMENTCAPITAL NEEDSCAPITALIZATIONCAR LOANSCENTRAL BANKCLOSED ECONOMYCOLLATERALCOMPARATIVE ADVANTAGECOMPARATIVE ADVANTAGESCONSUMER DURABLESCORPORATE INVESTMENTCOST OF FUNDSCREDIT CONSTRAINTSCREDIT CRUNCHCREDIT MARKETCRISES IN EMERGING MARKETSCURRENCYCURRENCY CRISESCURRENT ACCOUNTDEBT CAPACITYDEBT CRISISDEBT REPAYMENTDEFLATIONDEPENDENT VARIABLEDEPRECIATIONSDETERMINANTS OF FLUCTUATIONSDEVELOPING COUNTRIESDEVELOPMENT BANKDEVELOPMENT ECONOMICSDEVELOPMENT POLICYDIVERSIFICATIONDOMESTIC DEMANDDUMMY VARIABLEDURABLEDURABLE GOODSECONOMIC ACTIVITYECONOMIC RESEARCHECONOMIC THEORYEMERGING ECONOMIESEMERGING MARKETEMERGING MARKET COUNTRYEMERGING MARKETSEQUALITYEQUIPMENTEXCHANGE RATEEXCHANGE RATE REGIMEEXPENDITUREEXPENDITURESEXPORT GOODSEXPORTSEXTERNAL FINANCEEXTERNAL FINANCINGEXTERNAL SHOCKFINANCIAL ACCOUNTFINANCIAL CONSTRAINTFINANCIAL CONSTRAINTSFINANCIAL CRISESFINANCIAL CRISISFINANCIAL DEVELOPMENTFINANCIAL FACTORSFINANCIAL FLOWSFINANCIAL INTEGRATIONFINANCIAL MARKETFINANCIAL MARKETSFINANCIAL NEEDSFINANCIAL STUDIESFINANCIAL SUPPORTFINANCIAL SYSTEMFINANCING NEEDSFISCAL POLICIESFIXED EFFECTFIXED EFFECTSFOREIGN EXCHANGEFOREIGN EXCHANGE RESERVESFUTURE RESEARCHGDPGLOBAL FINANCIAL MARKETSGLOBALIZATIONGROWTH RATEGROWTH RATESHIGH INTEREST RATESHUMAN CAPITALIMBALANCESINDUSTRIAL COUNTRIESINFLATIONINFLATION TARGETINGINITIAL DEBTINSURANCEINTEREST RATEINTEREST RATE EFFECTSINTEREST RATESINTERNATIONAL BANKINTERNATIONAL BORROWINGINTERNATIONAL CAPITALINTERNATIONAL CAPITAL FLOWSINTERNATIONAL CAPITAL MARKETSINTERNATIONAL CREDITINTERNATIONAL ECONOMICSINTERNATIONAL FINANCIAL MARKETSINTERNATIONAL FINANCIAL STATISTICSINTERNATIONAL MONEYINTERNATIONAL RESERVESLABOR MARKETLABOR MARKETSLACK OF ACCESSLEVERAGELIBERALIZATIONLIQUIDITYLIQUIDITY CRUNCHLOCAL CURRENCYLOOSE MONETARY POLICYMACROECONOMIC PERFORMANCEMACROECONOMICSMANUFACTURING INDUSTRIESMARKET ACCESSMARKET MECHANISMMICRO DATAMONETARY ECONOMICSMONETARY FUNDMONETARY POLICYNET EXPORTSOPEN ECONOMIESOPEN ECONOMYOUTPUTOUTPUT COLLAPSESOUTPUT DECLINEOUTPUT DECLINESPOLICY RESPONSESPOLITICAL ECONOMYPRICE CHANGESPRICE VOLATILITYPRIVATE CAPITALPRIVATE CAPITAL FLOWSPROPERTY RIGHTSRANDOM VARIABLEREAL EXCHANGE RATEREAL GDPRECESSIONRECESSIONSRELATIVE PRICERELATIVE PRICESREMITTANCESRESERVERESERVE ACCUMULATIONRESERVESRESPONSE TO SHOCKSSOCIAL COSTSPECULATIVE ATTACKSTANDARD DEVIATIONSTANDARD DEVIATIONSSTOCK MARKETSTOCK MARKET CAPITALIZATIONSTOCK RETURNSTEQUILA CRISISTEST OF EQUALITYTRADABLE GOODSTRADE SURPLUSTRADINGTRADING COSTSTROUGHTURNOVERUNDERDEVELOPED COUNTRIESUNEMPLOYMENTVALUE ADDEDWEALTHWEALTH EFFECTWEALTH EFFECTSWEIGHTSWORKING CAPITALWORLD DEVELOPMENT INDICATORSWorld Bank10.1596/1813-9450-5605