# **5. Conclusion**

We have updated earlier analyses of sudden stops in order to shed light on what is known, what is not known, and what is changing. We compare the 1991-2002 period that was the focus of early analyses and on whose basis generalizations and conclusions were drawn with the subsequent period 2003-2014.

We confirm, most obviously, that sudden stops remain a problem. We count more of them in the second subperiod, but there are also more emerging economies actively involved in global financial markets in the second period. On balance, the frequency, duration and severity of sudden stops remains roughly unchanged across subperiods. However, the associated decline in GDP is somewhat larger in the second subperiod, plausibly reflecting larger capital inflows in the preceding four or so quarters and a larger turnaround in capital flows with the onset of the sudden stop.

In addition, there are indications of changes over time in the relative importance of global economic conditions and of country characteristics and policies in the incidence of sudden stops. We present some evidence that global factors, while always important, have grown more important recently. Our evidence suggests also that the global factors that matter most have been changing. Increases in U.S. policy interest rates, which matter for the supply of global liquidity, were relatively important in the 1990s. In contrast, the VIX, which contains information about global risk aversion and the demand for liquidity, was more important in the subsequent decade. In a number of respects, the policies of countries experiencing sudden stops were stronger in the second subperiod, but this was still no guarantee of insulation from sudden stops.

What stronger policies did permit, however, was a different response at the national level. In the first subperiod, countries with large budget deficits and high inflation had no choice but to tighten monetary and fiscal policies. In the second subperiod, the deficits and inflation rates of the affected countries were lower on average. Sudden stops still made financing deficits more difficult and required policy makers to stake painful steps so as to send reassuring signals to financial markets. But in a number of cases they were able to do so by tightening fiscal policy while at the same time loosening monetary policy so as to support domestic economic activity and the financial system. That foreign-currency mismatches were less and a significant number of central banks had installed inflation targeting regimes permitted them to adopt a more permissive attitude toward exchange rate depreciation than in the first subperiod. Larger foreign reserves similarly provided reassurance that the authorities had the wherewithal to intervene were those exchange rate movements to get out of hand.

That governments seemingly have more leeway in the more recent period for using monetary, fiscal and exchange rate policies in response to sudden stops would suggest that the negative output effects in these more recent episodes should have been less. Paradoxically, we find that the year-on-year output drop is at least as large in the second subperiod. This suggests that something else is also changing to magnify the output effects, where that something else could be the volume and make-up of international capital flows and/or the prevalence and impact of external shocks.

That stronger fiscal positions, more flexible exchange rates, deeper financial markets and less foreign currency mismatch has not better insulated emerging markets from sudden stops and 12