Capital mobility and sudden stops: consequences and policy options

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Title: Capital mobility and sudden stops: consequences and policy options
Author: Ball, Christopher Patrick
Abstract: This dissertation attempts in three essays to contribute to the growing body of research on the problems associated with sudden stops of capital inflows , known to have been at the heart of many recent emerging market crises . It does this by developing basic models that can incorporate sudden stops and hopefully make policy relevant recommendations . The first essay develops a simple three date representative agent model of a small open endowment economy without money . It allows sudden stops to occur at date two and asks whether individuals in such a shock -prone world are still better off borrowing than in autarky . Unambiguously , this chapter shows that individuals are better off borrowing than in autarky and provides a tractable core model on which the later chapters build . The second essay then includes a long -term borrowing option as well as country -specific risk premia based on an information asymmetry between domestic borrowers and international lenders . This allows analysis of optimal maturity choices in a meaningful way . The intent is to address questions in the literature concerning whether emerging economies could enhance welfare by imposing short -term capital controls to encourage the use of longer -maturing debt and thus avoid the sudden stop . The results imply that short -term capital controls would generally lower welfare , even when sudden stops are fully anticipated . Finally , the third essay extends the horizon of the model and includes a much wider range of maturities . This allows one to start making sense of maturity bunching (when a country's debt all matures around a given date ) which is known to exacerbate sudden -stop related problems . The model shows that maturity bunching can occur endogenously when both risk premia and uncertainty over the duration of the sudden stop are present .
URI: http : / /hdl .handle .net /1969 .1 /54
Date: 2004-09-30

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Capital mobility and sudden stops: consequences and policy options. Available electronically from http : / /hdl .handle .net /1969 .1 /54 .

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