Sudden Stops, Output Drops, and Credit Collapses

July 1, 2010

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Format: Chicago

Jihad Dagher. Sudden Stops, Output Drops, and Credit Collapses, (USA: International Monetary Fund, 2010) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper proposes a tractable Sudden Stop model to explain the main patterns in firm level data in a sample of Southeast Asian firms during the Asian crisis. The model, which features trend shocks and financial frictions, is able to generate the main patterns observed in the sample during and following the Asian crisis, including the ensuing credit-less recovery, which are also patterns broadly shared by most Sudden Stop episodes as documented in Calvo et al. (2006). The model also proposes a novel explanation as to why small firms experience steeper declines than their larger peers as documented in this paper. This size effect is generated under the assumption that small firms are growth firms, to which there is support in the data. Trend shocks when combined with financial frictions in this model also generate strong leverage effects in line with what is observed in the sample, and with other observations from the literature.

Subject: Balance of payments, Business cycles, Economic growth, Economic theory, Financial crises, Financial frictions, Financial institutions, Stocks, Sudden stops

Keywords: Business cycle, Business cycles, Economic growth, Financial deepening, Financial frictions, Financial liberalization, Firm decrease, Growth firm, Interest rate, Leverage firm, Market value, Maximization problem, Mover accent, Productivity parameter, Small firm, Southeast Asia, Stocks, Sudden stops, Transition probability, Welfare gain, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/176
Stock No:

WPIEA2010176
ISBN:

9781455201877
ISSN:

1018-5941

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