Sudden stops, sectoral reallocations, and the real exchange rate

Timothy J. Kehoe; Kim J. Ruhl

doi:10.1016/j.jdeveco.2009.01.003

Sudden stops, sectoral reallocations, and the real exchange rate

Timothy J. Kehoe, Kim J. Ruhl

Economics (Twin Cities)

Research output: Contribution to journal › Article › peer-review

61 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 language	English (US)
Pages (from-to)	235-249
Number of pages	15
Journal	Journal of Development Economics
Volume	89
Issue number	2
DOIs	https://doi.org/10.1016/j.jdeveco.2009.01.003
State	Published - Jul 2009

Bibliographical note

Funding Information:
This paper has benefited from discussions with George Alessandria, David Backus, Michael Devereux, Patrick Kehoe, Enrique Mendoza, Carlos Végh, and the participants at the Micro Foundations of Real Exchange Rates Conference at the Carnegie Bosch Institute, the Workshop on Structural Analysis of Business Cycles in the Open Economy at the Sveriges Riksbank, the XXXI Simposio del Análisis Económico, the New Perspectives on Financial Globalization Conference at the International Monetary Fund, and seminars at Arizona State University, UCLA, MIT, and Washington University in St. Louis. We thank Gordon Hanson, Enrique Mendoza, and two anonymous referees for helpful comments and suggestions. This work was undertaken with the support of the National Science Foundation under grant SES-0536970. All of the data used in this paper are available at www.econ.umn.edu/~tkehoe . The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

Keywords

Developing country crisis
Mexico
Nontradable
Real exchange rate
Sudden stop
Total factor productivity
Tradable

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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Sudden stops, sectoral reallocations, and the real exchange rate

Abstract

Bibliographical note

Keywords

UN SDGs

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