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SUDDEN STOPS, OUTPUT DROPS, AND CREDIT COLLAPSES

Published online by Cambridge University Press:  28 March 2013

Jihad C. Dagher
Jihad C. Dagher*
Affiliation:
International Monetary Fund
*
Address correspondence to: Jihad C. Dagher, International Monetary Fund, 1900 Pennsylvania Ave., Washington, DC 20234, USA; e-mail: jdagher@imf.org.
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Abstract

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This paper proposes a tractable sudden stop model to explain the main patterns in firm-level data from a sample of Southeast Asian firms during the Asian crisis. The model incorporates trend shocks and financial frictions, features that have so far been used separately in the literature on emerging markets. A negative shock to trend productivity growth can account, in our model, for the drop in output and its swift recovery together with the sizable and persistent downward adjustment in firms' Tobin's Q and debt levels. These patterns are broadly shared by most sudden stop episodes as documented in the literature. Trend shocks can also generate, in our model, strong leverage effects in line with the firm-level data and other observations from the literature.

Keywords

Sudden StopsFinancial FrictionsTrend ShocksCreditless RecoveryLeverage

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 4 , June 2014, pp. 812 - 837
Copyright
Copyright © Cambridge University Press 2013 

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