Caner, MehmetKoehler-Geib, FritziVincelette, Gallina Andronova2012-03-192012-03-192009-08-01https://hdl.handle.net/10986/4214This paper analyzes the drivers and consequences of sudden stops of capital flows. It focuses on the impact of external vulnerability on the depth and length of sudden stop crises. The authors analyze 43 developing and developed countries between 1993 and 2006. They find evidence that external vulnerability not only significantly impacts the probability of a sudden stop crisis, but also prolongs the time it takes for growth to revert to its long-term trend once a sudden stop occurs. Interestingly, external vulnerability does not significantly impact the size of the instantaneous output effect in case of a sudden stop but prompts a cumulative output effect through significantly diminishing the speed of adjustment of output to its trend. This finding implies that countries financing a large part of their absorption externally do not suffer more ferocious output losses in a sudden stop crisis, but take longer to adapt afterward and are hence expected to suffer more protracted crises periods. Compared with previous literature, this paper makes three contributions: (i) it extends the country and time coverage relative to datasets that have previously been used to analyze related topics; (ii) it specifically accounts for time-series autocorrelation; and (iii) it provides an analysis of the adjustment path of economic growth after a sudden stop.CC BY 3.0 IGOADJUSTMENT DYNAMICSADJUSTMENT PATHANNUAL GROWTHANNUAL GROWTH RATEASSET POSITIONSBANKING SECTORBASIS POINTSBONDBOND INDEXCAPITAL FLOWCAPITAL FLOWSCAPITAL FORMATIONCOMMODITYCOMMODITY EXPORTSCOMMODITY PRICESCONSUMPTION EXPENDITURECOUNTRY SPECIFICCREDIT GROWTHCREDIT RATINGSCURRENCYCURRENCY COMPOSITIONCURRENCY CRISESCURRENCY DATACURRENCY MISMATCHESCURRENT ACCOUNTCURRENT ACCOUNT BALANCECURRENT ACCOUNT DEFICITCURRENT ACCOUNT DEFICITSDATA SETSDEBTDEMAND DEPOSITSDEPENDENT VARIABLEDEPOSITSDEPRECIATIONDESCRIPTIVE STATISTICSDEVELOPED COUNTRIESDEVELOPING COUNTRIESDEVELOPMENT ECONOMICSDOMESTIC CURRENCYDOMESTIC MARKETDUMMY VARIABLEDUMMY VARIABLESECONOMETRIC ANALYSISECONOMIC GROWTHECONOMIC POLICYECONOMICSEMERGING ECONOMIESEMERGING MARKETEMERGING MARKET COUNTRIESEMERGING MARKET ECONOMIESEMERGING MARKETSEMPIRICAL RESULTSEQUATIONSEQUILIBRIUMERROR TERMERROR TERMSESTIMATION RESULTSEXCHANGE RATE FLUCTUATIONSEXPORTERSEXTERNAL FINANCINGEXTERNAL IMBALANCESFEDERAL RESERVEFEDERAL RESERVE BANKFINANCIAL CRISESFINANCIAL CRISISFINANCIAL FLOWSFINANCIAL FRAGILITYFINANCIAL MARKETFINANCIAL OPENNESSFINANCIAL RISKSFINANCIAL STUDIESFISCAL BALANCESFIXED CAPITALFIXED EFFECTSFIXED EFFECTS ESTIMATIONFIXED RATESFOREIGN CURRENCYFOREIGN CURRENCY ASSETSFOREIGN CURRENCY LENDINGFOREIGN DIRECT INVESTMENTFOREIGN FINANCINGFOREIGN LIABILITIESFOREIGN RESERVESGDPGDP PER CAPITAGROSS DOMESTIC PRODUCTGROSS FIXED CAPITAL FORMATIONGROWTH EQUATIONGROWTH IMPACTGROWTH PERFORMANCEGROWTH RATEGROWTH RATESIMBALANCESIMPORTSINCOME GROWTHINCOME LEVELSINDEBTEDNESSINDEPENDENT MONETARY POLICYINDUSTRIALIZED COUNTRIESINFLOWS OF CAPITALINTERNATIONAL BANKINTERNATIONAL FINANCIAL MARKETSINVESTMENT RATIOLIABILITYLONG RUNMACROECONOMIC VARIABLESMATURITIESMATURITYMATURITY MISMATCHESMAXIMUM LIKELIHOOD ESTIMATIONNEGATIVE EFFECTNEGATIVE IMPACTNORMAL DISTRIBUTION0 HYPOTHESISOUTPUTOUTPUT GROWTHOUTPUT LOSSOUTPUT LOSSESOUTPUT PER CAPITAPER CAPITA GROWTHPER CAPITA INCOMEPER CAPITA INCOME LEVELSPOLICY RESEARCHPOPULATION GROWTHPOVERTY REDUCTIONRAPID GROWTHREAL EXCHANGE RATEREAL GDPREGIONAL DUMMIESRELATIVE PRICESRESERVE MONEYRETURNRISK AVERSIONROBUSTNESS CHECKROBUSTNESS CHECKSSPEED OF ADJUSTMENTSTANDARD DEVIATIONSTIME HORIZONTRADABLE GOODSTRADE BALANCETRADE BALANCESTRADE SHOCKTRADE SHOCKSTRANSITION ECONOMIESVALUE ADDEDVOLATILITYWorld Bank10.1596/1813-9450-5021