Explaining Sudden Stops, Growth Collapse and BOP Crises: The Case of Distortionary Output Taxes / Guillermo A. Calvo.

Format:

Book

Author/Creator:

Calvo, Guillermo A.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w9864.

NBER working paper series no. w9864

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Explaining Sudden Stops, Growth Collapse and BOP Crises

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2003.

Summary:

The paper discusses a model in which growth is a negative function of fiscal burden. Moreover, growth discontinuously switches from high to low as fiscal burden reaches a critical level. Growth collapse is associated with a Sudden Stop of capital inflows, real depreciation and a drop in output (driven by a fall in the output of nontradables)-all of which have occurred during recent financial crises in Emerging Markets. The monetary version of the model is employed to show that BOP crises could be a result of fiscal distortions. In particular, it is further argued that BOP crisis could be a justifiable central bank response to growth collapse, although realistic circumstances may make this response highly ineffective. An important policy implication of the model is that in order to avoid Sudden Stop crises, policymakers should aim at improving fiscal institutions. Lowering the fiscal deficit is highly effective in the medium term

Notes:

Print version record

July 2003.