Sudden Stops and the Structure of Capital Flows: The Case of Emerging and Developing Countries

Abstract

Sudden stop episodes have been the cause of major financial instability and crises, particularly in emerging and developing countries. In that sense, it is relevant for policymakers to clearly identify what are the main determinants of sudden stops to better manage external imbalances and avoid macroeconomic instability. We look into the structure of financial flows to assess whether the likelihood of a sudden stop increases with the accumulation of certain type of inflows. We argue that the size of Bank Claims and Other Investments, rather than the size of the current account, is one of the main determinants of sudden stop episodes. Using data for 41 emerging and developing countries for the period 1984-2010, we estimate a probit model and find that Bank Claims and Other Investments are indeed positively associated with the likelihood of experiencing a sudden stop.