Chapter

Credit, Prices, and Crashes

Edited by Enrique G. Mendoza

in Preventing Currency Crises in Emerging Markets

Published by University of Chicago Press

Published in print November 2002 | ISBN: 9780226184944
Published online February 2013 | e-ISBN: 9780226185057 | DOI: http://dx.doi.org/10.7208/chicago/9780226185057.003.0008
Credit, Prices, and Crashes

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This chapter describes the role played by sudden stops (SSs) of capital inflows in triggering a financial crisis. It argues that SS episodes are qualitatively different from standard balance-of-payments crises. Credit frictions are modeled in an exchange economy that abstracts from the existence of money. SSs in the model can be driven by policy uncertainty, by domestic productivity shocks, by foreign shocks affecting the real interest rate, or by a mixture of all three. Persistent changes on the creditworthiness of emerging economies have the perverse impact of resulting to an increased short-run probability of SSs. Policy intervention is worth considering but also that the type of policies that can be effective for managing sudden stops need to be carefully chosen. Thus, this chapter provides a better welfare analysis of sudden stop episodes.

Keywords: sudden stops; capital inflows; financial crisis; policy intervention; credit; foreign shocks

Chapter.  21547 words.  Illustrated.

Subjects: International Economics

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