Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/70433
Authors: 
Mertens, Karel
Year of Publication: 
2007
Series/Report no.: 
CAE Working Paper 07-10
Abstract: 
This paper presents a flexible-price small open economy model with a peso problem in productivity states. Agents rationally adjust their beliefs about future productivity growth after the arrival of news. A downward revision of expectations triggers a Sudden Stop, together with large declines in GDP, employment, consumption and investment. There need not be any actual change in productivity growth to generate large fluctuations. Quantitatively, the model goes a long way in matching the 1998 Korean Crisis and subsequent swift recovery.
Subjects: 
sudden stops
small open economy
expectations
peso problem
JEL: 
E2
E3
F3
F4
Document Type: 
Working Paper

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