Fear of sudden stops
Subtitle: lessons from Australia & Chile
By: Ricardo J. Caballero, Kevin Cowan [and] Jonathan Kearns
Contributors: Massachusetts Institute of Technology. Dept. of Economics; Cowan, Kevin; Kearns, Jonathan
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 04-23; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 04-23.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Number of pages: 52
Description: Latin American economies are exposed to substantial external vulnerability. Domestic imbalances and terms of trade shocks are often exacerbated by sudden stops of capital inflow. In this paper we explore ways of overcoming external vulnerability, drawing lessons from a detailed comparison of the response of Chile and Australia to recent external shocks and from Australia's historical experience. We argue that in order to understand sudden stops and the mechanisms to smooth them, it is useful to identify and then distinguish between two inter-related dimensions of investors' confidence: country-trust and currency-trust. Lack of country-trust is a more fundamental and serious problem behind sudden stops. But lack of currency-trust may both be a source of country-trust problems and weaken a country's ability to deal with sudden stops. We discuss steps to improve along these two dimensions of investors' confidence in the medium run, and policies to reduce the impact of country-trust and currency-trust weaknesses in the short run. Keywords: Sudden stops, Australia, Chile.
Notes: "May 2004."

Includes bibliographical references (p. 49-52).

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