External Finance, Sudden Stops, and Financial Crisis: What is Different This Time?
July 1, 2010
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Summary
This paper develops a two-country DSGE model to investigate the transmission of a global financial crisis to a small open economy. We find that economies hit by a sudden stop arising from financial distress in the global economy are likely to face a more prolonged crisis than sudden stop episodes of domestic origin. Moreover, in contrast to the existing literature, our results suggest that the greater a country's trade integration with the rest of the world, the greater the response of its macroeconomic aggregates to a sudden stop of capital flows.
Subject: Consumption, Currencies, Financial crises, Labor, Money, National accounts, Return on investment, Self-employment
Keywords: capital demand, capital goods, Consumption, Currencies, domestic economy, DSGE model, economy variable, Emerging Markets, equilibrium mark-up, Financial Crises, financial crisis, Global, net export, nominal price, optimal contract, price adjustment cost, price level, production firm, Return on investment, risk premium, Self-employment, Sudden Stops, WP
Pages:
34
Volume:
2010
DOI:
Issue:
158
Series:
Working Paper No. 2010/158
Stock No:
WPIEA2010158
ISBN:
9781455201419
ISSN:
1018-5941
