Sudden Stops and Currency Drops: A Historical Look
IMF Working Papers, May 1, 2006
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- Sudden Stops and Currency Drops: A Historical Look
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Bibliographic details
- Authors: Luis Catão
- Published: May 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451863932.001
Summary
- 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 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.
- Not all SSs resulted in currency drops: some countries experienced currency collapses, while others managed to preserve exchange rate stability.
- Different responses are related to domestic "frictions" that heightened the procyclicality of absorption and hindered precautionary reserve accumulation in some countries relative to others.
Key Findings and Statistics
- Episodic capital flow reversals averaged: 5 percent of GDP.
- Median duration of sudden stops: four years.
- Publication pagination: Pages: 61.
- Publication identifiers:
- Volume: 2006
- Issue: 133
- Series: Working Paper No. 2006/133
- DOI: https://doi.org/10.5089/9781451863932.001
- Stock No: WPIEA2006133
- ISBN: 9781451863932
- ISSN: 1018-5941
Synchronization and Global Conditions
- Most SSs were immediately preceded by rising world interest rates, producing striking crosscountry synchronization of capital flow reversals.
- Synchronization occurred across both fixed and floating exchange rate regimes, with no significant differences documented between them.
Exchange Rate Outcomes and Domestic Frictions
- Outcome heterogeneity:
- Some countries experienced currency collapses.
- Other countries preserved exchange rate stability despite SSs.
- Determinants of divergent outcomes:
- Domestic "frictions" increased procyclicality of absorption.
- These frictions hindered precautionary reserve accumulation in some countries, reducing their ability to cushion against capital flow reversals.
Subject Classification and Keywords
- Subject: Capital flows, Capital inflows, Currencies, Exchange rates, Securities settlement systems
- Keywords: crash event, currency crash, currency-crash country, money supply, WP
Sudden Stops and Currency Drops: A Historical Look — Luis Catão, May 1, 2006.
Content in this bundle
- Net Foreign Capital Inflows