Sudden stops, sectoral reallocations, and the real exchange rate

Timothy J. Kehoe, Kim J. Ruhl

Research output: Contribution to journalArticle

45 Scopus citations

Abstract

A sudden stop of capital flows into a developing country tends to be followed by a rapid switch from trade deficits to surpluses, a depreciation of the real exchange rate, and decreases in output and total factor productivity. Substantial reallocation takes place from the nontraded sector to the traded sector. We construct a multisector growth model, calibrate it to the Mexican economy, and use it to analyze Mexico's 1994-95 crisis. When subjected to a sudden stop, the model accounts for the trade balance reversal and the real exchange rate depreciation, but it cannot account for the decreases in GDP and TFP. Extending the model to include labor frictions and variable capital utilization, we still find that it cannot quantitatively account for the dynamics of output and productivity without losing the ability to account for the movements of other variables.

Original languageEnglish (US)
Pages (from-to)235-249
Number of pages15
JournalJournal of Development Economics
Volume89
Issue number2
DOIs
StatePublished - Jul 1 2009

All Science Journal Classification (ASJC) codes

  • Development
  • Economics and Econometrics

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