Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops

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Date
1998-11Author
Calvo, Guillermo A.
Citation
Calvo, Guillermo A. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops" Journal of Applied Economics, Vol. 1, No. 1, November 1998, pp. 35-54
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The paper studies mechanisms through which a sudden stop in international credit flows may bring about
financial and balance of payments crises. It is shown that these crises can occur even though the current account
deficit is fully financed by foreign direct investment. However, equity and long-term bond financing may shield the
economy from sudden stop crises. The paper also examines possible factors that could trigger sudden stops, and
argues that the greater independence that countries have, as compared to regions of a given country, could help to
explain why sudden stop crises are more prevalent and destructive at international than at national levels.