On the Consequences of Sudden Stops

Abstract

On the Consequences of Sudden StopsMoney . . .has oppressed nearly all people in one of two ways: either it has been abundant and very unreliable, or reliable and very scarce. John Kenneth Galbraith, The Age of Uncertainty Sudden stops in capital flows-and the ensuing current account reversals they induce-have been at the center of economic policy discussions since the outbreak in the mid-1990s of the series of financial crises that plagued emerging market economies.Sudden stops spared no region and have been particularly prevalent in both Asia and Latin America.As a result of these crises, policymakers and researchers alike directed their attention toward identifying the causes and designing policies to prevent crises. 1 In fact, policy circles placed substantial effort in the development of a system of early warning signals, under the presumption that some key country fundamentals would be sufficient for identifying future crises. 2 The reality of capital market behavior soon showed, however, that a number of institutional and regulatory factors might easily spur contagion across seemingly unconnected economies, often with little relation to the 171

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