Sudden Stops and Financial Frictions : Evidence from Industry Level Data

The nature of the microeconomic frictions that transform sudden stops in output collapses is not only of academic interest, but also crucial for the correct design of policy responses to prevent and address these episodes and the lack of evidence on this regard is an important shortcoming. This paper uses industry-level data in a sample of 45 developed and emerging countries and a differences-in-differences methodology to provide evidence of the role of financial frictions for the consequences of sudden stops. The results show that, consistently with financial frictions being important, industries that are more dependent on external finance decline significantly more during a sudden stop, especially in less financially developed countries. The results are robust to controlling for other possible mechanisms, including labor market frictions. The paper also provides results on the role of comparative advantage during sudden stops and on the usefulness of various policy responses to attenuate the consequences of these shocks.

Bibliographic Details

Main Authors:	Cowan, Kevin, Raddatz, Claudio
Language:	English
Published:	2011-03-01
Subjects:	ABSOLUTE VALUE, ACCESS TO FINANCE, ACCESS TO INTERNATIONAL FINANCIAL MARKETS, ASSET MARKETS, ASSET PRICES, ASSETS, BALANCE SHEET, BALANCE-SHEET, BANKING SECTOR, BILL, BORROWING CAPACITY, BUSINESS CYCLE, BUSINESS CYCLES, CAPITAL ACCOUNT, CAPITAL CONTROLS, CAPITAL FLIGHTS, CAPITAL FLOW, CAPITAL FLOWS, CAPITAL FLOWS REVERSALS, CAPITAL INFLOWS, CAPITAL INTENSITY, CAPITAL INVESTMENT, CAPITAL NEEDS, CAPITALIZATION, CAR LOANS, CENTRAL BANK, CLOSED ECONOMY, COLLATERAL, COMPARATIVE ADVANTAGE, COMPARATIVE ADVANTAGES, CONSUMER DURABLES, CORPORATE INVESTMENT, COST OF FUNDS, CREDIT CONSTRAINTS, CREDIT CRUNCH, CREDIT MARKET, CRISES IN EMERGING MARKETS, CURRENCY, CURRENCY CRISES, CURRENT ACCOUNT, DEBT CAPACITY, DEBT CRISIS, DEBT REPAYMENT, DEFLATION, DEPENDENT VARIABLE, DEPRECIATIONS, DETERMINANTS OF FLUCTUATIONS, DEVELOPING COUNTRIES, DEVELOPMENT BANK, DEVELOPMENT ECONOMICS, DEVELOPMENT POLICY, DIVERSIFICATION, DOMESTIC DEMAND, DUMMY VARIABLE, DURABLE, DURABLE GOODS, ECONOMIC ACTIVITY, ECONOMIC RESEARCH, ECONOMIC THEORY, EMERGING ECONOMIES, EMERGING MARKET, EMERGING MARKET COUNTRY, EMERGING MARKETS, EQUALITY, EQUIPMENT, EXCHANGE RATE, EXCHANGE RATE REGIME, EXPENDITURE, EXPENDITURES, EXPORT GOODS, EXPORTS, EXTERNAL FINANCE, EXTERNAL FINANCING, EXTERNAL SHOCK, FINANCIAL ACCOUNT, FINANCIAL CONSTRAINT, FINANCIAL CONSTRAINTS, FINANCIAL CRISES, FINANCIAL CRISIS, FINANCIAL DEVELOPMENT, FINANCIAL FACTORS, FINANCIAL FLOWS, FINANCIAL INTEGRATION, FINANCIAL MARKET, FINANCIAL MARKETS, FINANCIAL NEEDS, FINANCIAL STUDIES, FINANCIAL SUPPORT, FINANCIAL SYSTEM, FINANCING NEEDS, FISCAL POLICIES, FIXED EFFECT, FIXED EFFECTS, FOREIGN EXCHANGE, FOREIGN EXCHANGE RESERVES, FUTURE RESEARCH, GDP, GLOBAL FINANCIAL MARKETS, GLOBALIZATION, GROWTH RATE, GROWTH RATES, HIGH INTEREST RATES, HUMAN CAPITAL, IMBALANCES, INDUSTRIAL COUNTRIES, INFLATION, INFLATION TARGETING, INITIAL DEBT, INSURANCE, INTEREST RATE, INTEREST RATE EFFECTS, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL BORROWING, INTERNATIONAL CAPITAL, INTERNATIONAL CAPITAL FLOWS, INTERNATIONAL CAPITAL MARKETS, INTERNATIONAL CREDIT, INTERNATIONAL ECONOMICS, INTERNATIONAL FINANCIAL MARKETS, INTERNATIONAL FINANCIAL STATISTICS, INTERNATIONAL MONEY, INTERNATIONAL RESERVES, LABOR MARKET, LABOR MARKETS, LACK OF ACCESS, LEVERAGE, LIBERALIZATION, LIQUIDITY, LIQUIDITY CRUNCH, LOCAL CURRENCY, LOOSE MONETARY POLICY, MACROECONOMIC PERFORMANCE, MACROECONOMICS, MANUFACTURING INDUSTRIES, MARKET ACCESS, MARKET MECHANISM, MICRO DATA, MONETARY ECONOMICS, MONETARY FUND, MONETARY POLICY, NET EXPORTS, OPEN ECONOMIES, OPEN ECONOMY, OUTPUT, OUTPUT COLLAPSES, OUTPUT DECLINE, OUTPUT DECLINES, POLICY RESPONSES, POLITICAL ECONOMY, PRICE CHANGES, PRICE VOLATILITY, PRIVATE CAPITAL, PRIVATE CAPITAL FLOWS, PROPERTY RIGHTS, RANDOM VARIABLE, REAL EXCHANGE RATE, REAL GDP, RECESSION, RECESSIONS, RELATIVE PRICE, RELATIVE PRICES, REMITTANCES, RESERVE, RESERVE ACCUMULATION, RESERVES, RESPONSE TO SHOCKS, SOCIAL COST, SPECULATIVE ATTACK, STANDARD DEVIATION, STANDARD DEVIATIONS, STOCK MARKET, STOCK MARKET CAPITALIZATION, STOCK RETURNS, TEQUILA CRISIS, TEST OF EQUALITY, TRADABLE GOODS, TRADE SURPLUS, TRADING, TRADING COSTS, TROUGH, TURNOVER, UNDERDEVELOPED COUNTRIES, UNEMPLOYMENT, VALUE ADDED, WEALTH, WEALTH EFFECT, WEALTH EFFECTS, WEIGHTS, WORKING CAPITAL, WORLD DEVELOPMENT INDICATORS,
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110322080205 https://hdl.handle.net/10986/3371
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