infrastructure projects remain on track? Alternatively, in _<u>good times</u>_ , when foreign capital flows into the domestic economy, policymakers typically ask what type of policies are effective to manage this surge of capital inflows. How can countries limit the real appreciation of the domestic currency to avoid a loss in competitiveness? How can countries tailor the structure of capital flows that they receive to their development needs? Should they strengthen their institutional and financial infrastructure? As a result, the effects of capital flows on policymaking are large both in good times and in bad times.<sup>4</sup> The main goal of this paper is to re-examine the determinants of sudden stops by distinguishing the different sources of the decline in the financial account of the balance of payments. We evaluate whether the determinants of sudden stops may differ by type —that is, whether the same set of forcing variables have different impact on the drop in the financial account when driven by a reduction in inflows from foreign investors or when driven by a larger outflow by domestic residents. We first argue that the decision of foreign investors may be different from that of domestic ones because of information asymmetries. For instance, foreign investors may have informational disadvantages relative to domestic investors regarding the investment climate of the domestic economy, differences in regulatory frameworks, intricate tax systems, and differences in the efficiency of the judiciary system, among others. The differences in the decision making process of foreign vis-à-vis domestic investors can also be attributed to the differences in reading and evaluating information –which, in turn, is determined by the costs of processing information on the domestic economy. However, we should recognize that with all the advances in information and communication technology (ICT), those differences are narrowing. Finally, foreign investors may be more sensitive than local investors to “ _push factors_ ” of capital flows into the domestic economy. For instance, global investors are more prone to invest their capital in the domestic economy if the returns in their economies (say, the interest rate in the foreign country) are lower. If local investors may still invest in the foreign country despite the lower world interest rate, considerations on foreign assets as safe assets (say, US T-bills) may prevail. This paper also presents some empirical evidence on the different time-bunching of sudden stops by source (Figure 4) and the differences in their macroeconomic consequences (Figure 5 and Table 6). These findings may indicate differences in the determinants of sudden stops driven by foreign investors ( _inflow-driven_ ) vis-à-vis those driven by decisions of local investors ( _outflow-driven_ ). If that is the case, preventive policies implemented by governments will also differ.

In order to analyze the questions in this paper we gather information on gross capital flows for 185 countries from 1970 to 2007. Then our _effective sample_ is reduced to 82 countries while eliminating small countries ( _i.e._ with population less than 1 million in 2007 and gross national income per capita lower than US$ 2000) and countries with few observations ( _i.e._ less than 9 consecutive annual observations). We follow the procedure outlined in Guidotti, Sturzenegger and Villar (2004) to define a sudden stop as the reduction in the financial account that is at least one standard deviation below the mean and exceed 5 percent of GDP. To ascertain whether the

> 4 Kose, Elekdag and Cardarelli (2009) have recently documented the policy responses to surges in private capital inflows across a wide array of developing and industrial countries.

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