Chapter

Sudden Stops and Currency Drops

Luis A. V. Catão

in The Decline of Latin American Economies

Published by University of Chicago Press

Published in print August 2007 | ISBN: 9780226185002
Published online February 2013 | e-ISBN: 9780226185033 | DOI: http://dx.doi.org/10.7208/chicago/9780226185033.003.0008
Sudden Stops and Currency Drops

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This chapter describes the historical evidence on sudden stops (SSs) using a new international data set on capital inflows spanning sixteen countries since the early days of financial globalization, around 1870—when asset market arbitrage was greatly spurred by the advent of the transatlantic telegraph in 1866. Two key features that underpin the current relevance of this period are the high degree of integration of world capital markets and the widespread use of bond financing as the main instrument of sovereign borrowing—two clear similarities with its late twentieth-century/early twenty-first century counterpart. The chapter also establishes the links between SSs and currency crashes. One feature of the pre-World War I period, which makes it especially interesting to look at this relationship, is the existence of an international monetary system that provided a key incentive for countries to peg their currencies to gold and thus forestall devaluations or depreciations.

Keywords: sudden stops; capital inflows; financial globalization; asset market arbitrage; capital markets; bond financing; currency crashes; international monetary system; devaluations; depreciations

Chapter.  14803 words.  Illustrated.

Subjects: International Economics

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