When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options

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Date
1999-06-29Author
Calvo, Guillermo A.
Reinhart, Carmen M.
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In this paper we present evidence that capital account reversals have become more severe for
emerging markets. Because policy options are limited in the midst of a capital market crisis
and because so many countries have already had crises recently, we focus on some of the
policies that could reduce the incidence of crises in the first place, or at least make the sudden
stop problem less severe. In this regard, we consider the relative merits of capital controls
and dollarization. We conclude that, while the evidence suggests that capital controls appear
to influence the composition of flows skewing flows away from short maturities, such
policies are not likely to be a long-run solution to the recurring problem of sudden capital
flow reversals. Yet, because fear of floating, many emerging markets are likely to turn to
increased reliance on controls. Dollarization would appear to have the edge as a more marketoriented
option to ameliorate, if not eliminate, the sudden stop problem.
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