Fear of Sudden Stops: Lessons from Australia and Chile / Ricardo Caballero, Kevin Cowan, Jonathan Kearns.

Format:

Book

Author/Creator:

Caballero, Ricardo.

Contributor:

National Bureau of Economic Research.

Cowan, Kevin.

Kearns, Jonathan.

Series:

Working Paper Series (National Bureau of Economic Research) no. w10519.

NBER working paper series no. w10519

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Fear of Sudden Stops

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2004.

Summary:

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.

Notes:

Print version record

May 2004.