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Sudden Stops and Currency Drops: A Historical Look

Author/Editor: Catão, Luis
Authorized for Distribution: May 1, 2006
Electronic Access: Free Full Text (PDF file size is 673KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: This paper shows that recent manifestations of sudden stops (SSs) in international capital flows have striking parallels in the early financial globalization era preceding World War I. All main capital-importing countries then faced episodic capital flow reversals averaging some 5 percent of GDP and with a median duration of four years. Most SSs also displayed striking crosscountry synchronization, being immediately preceded by rising world interest rates. Both fixed and floating exchange rate regimes were hit, with no significant differences between them. Yet, not all SSs resulted in currency drops: while some countries experienced currency collapses, others managed to preserve exchange rate stability. These different responses are related to domestic "frictions" that heightened the procyclicality of absorption and hindered precautionary reserve accumulation in some countries relative to others.
 
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Series: Working Paper No. 06/133
Subject(s): Financial crisis | Capital flows | Exchange rate regimes
Author's keyword(s): Sudden stops | currency crises | international capital flows | gold standard
 
English  
    Published:   May 1, 2006        
    ISBN/ISSN:   0 / 1934-7073   Format:   Paper
    Stock No:   WPIEA2006133   Pages:   61
    Price:   US$15.00 (Academic Rate: US$15.00 )
       
     
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