This paper surveys the theoretical and empirical evidence on capital account convertibility and assesses its relevance for the reform states of Central and Eastern Europe. Its major findings are that domestic investment conditions matter and that domestic policies can reduce the risk of an...

We analyze the sources of current account fluctuations for the G6 economies. Based on Bergin and Sheffrin's (2000) two-goods inter-temporal framework, we build a SVAR model including the world real interest rate, net output, real exchange rate, and the current account. The theory model allows...

In the canonical monetary policy model, money is endogenous to the optimal path for interest rates and output. But when liquidity provision by banks dominates the demand for transactions money from the real economy, money is likely to contain information for future output and inflation because...

Empirical evidence suggests that real exchange rates (RER) behave differently in developed and developing countries. We develop an overlapping generations two-sector exogenous growth model in which RER determination may depend on the country's capacity to borrow from international capital...

We show that a flex-price two-sector open economy DSGE model can explain the poor degree of international risk sharing and exchange rate disconnect. We use a suite of model evaluation measures and examine the role of (i) traded and non-traded sectors; (ii) financial market incompleteness; (iii)...

Financial stability is an important policy objective, since crises are associated with large economic, social and political costs. Promoting stability requires preventing 'sudden stops' in capital flows, which are events in which foreign financing abruptly disappears. This paper contributes to...

This paper analyzes the relevance of external factors in average quarterly GDP growth for 1990-2006 in the seven largest Latin American countries (LAC7). Modeling the relationship between LAC7 GDP and several external factors, it is found that those factors account for a significant share of...

Using a sample of 110 developed and developing countries for the period 1990-2004, this paper analyzes the characteristics of systemic sudden stops (3S) in capital flows and the relevance of balance-sheet effects in the likelihood of their materialization. A small supply of tradable goods...

Openness to trade is one factor that has been identified as determining whether a country is prone to sudden stops in capital inflows, crashes in currencies, or severe recessions. Some believe that openness raises vulnerability to foreign shocks, while others believe that it makes adjustment to...

Using a sample of emerging markets that are integrated into global bond markets, we analyze the collapse and recovery phase of output collapses that coincide with systemic sudden stops, defined as periods of skyrocketing aggregate bond spreads and large capital flow reversals. Our findings...