Working papers // Department of Economics, Rutgers, the State University of New Jersey 2006,06
This paper studies the effects of capital flow reversals and sudden stop crises on output growth and how these effects vary across regions and between emerging and industrial countries. We found that capital flow reversals are generally contractionary in the developing countries and particularly in Asia and Africa. But neither capital flow reversals nor sudden stop crises have any significant growth effect in the industrial countries. Our initial estimates for sudden stop crises support the widely held belief regarding the contractionary nature of such crises. Further robustness checks indicate that the estimated negative growth effects for such crises are mainly driven by the presence of the Asian countries in the sample. Moreover, when the turbulent years of the East Asian crises are excluded from the sample, no significant effect of sudden stop crises could be found. Our research reconfirms the contractionary nature of capital flow reversals in developing countries but raises doubt about the existence of contractionary sudden stop crises.
Capital flow reversal currency crisis sudden stop crisis