A global equilibrium model of sudden stops and external liquidity management
By: [by] Ricardo J. Caballero [and] Stavros Panageas
Contributors: Panageas, Stavros; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 08-05; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 08-05.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2007
Place of publication: Cambridge, MA
Language: eng
Number of pages: 53
Description: Emerging market economies, which have much of their growth ahead of them, either run or should run persistent current account deficits in order to smooth consumption intertemporally. The counterpart of these deficits is their dependence on capital inflows, which can suddenly stop. We make two contributions in this paper: First, we develop a quantitative global-equilibrium model of sudden stops. Second, we use this structure to discuss practical mechanisms to insure emerging markets against sudden stops, ranging from conventional non-contingent reserves accumulation to more sophisticated contingent instrument strategies. Depending on the source of sudden stops, their correlation with world events, and the quality of the hedging instrument available, the gains from these strategies can represent a substantial improvement over existing practices. Keywords: Capital flows, sudden stops, reserves, international liquidity management, world, capital markets, swaps, insurance, hedging, options, hidden states, Bayesian methods. JEL Classifications: E2, E3, F3, F4, G0, C1.
Notes: "September 7, 2007."

Includes bibliographical references (p. 52-53).

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