Trend shocks and sudden stops Articles uri icon

publication date

  • November 2019

start page

  • 1

end page

  • 10

issue

  • 103252

volume

  • 121

International Standard Serial Number (ISSN)

  • 0022-1996

Electronic International Standard Serial Number (EISSN)

  • 1873-0353

abstract

  • Sudden Stops are characterized by large output drops, current account reversals and real exchange rate depreci-ation followed by a slow recovery, a pattern that has proven to be hard to capture with standard open economymodels. This paper extends the standard models with endogenous collateral constraints to include permanentincome (trend) shocks and studies the optimal policy design in this setting. Wefind that shocks to the trendplay an important role in generating a Sudden Stop followed by a slow recovery, a result that is also supportedby the data. With trend and transitory shocks, optimal capital control policy is procyclical, although less sothan under transitory shocks only.

keywords

  • borrowing constraints; rend shocks; sudden stops; optimal capital controls