Sudden Stops in Emerging Markets: How to Minimize Their Impact on GDP?

Since the beginning of the 1990’s, capital flows to emerging markets soared to historically high levels. However, many countries suffered sudden stops in the capital flows. Moreover, these sudden stops affected simultaneously several countries with different economic characteristics. Taking into account the sudden stop episodes that occurred after 1990, this work attempts to analyze in an empirical manner which characteristics and policies helped to reduce the cost of the different crisis over GDP. The countries with a lower level of external debt had a less costly crisis. Additionally, a countercyclical fiscal policy and the sale of international reserves to contain the domestic currency’s depreciation also helped to reduce the cost of the sudden stops over gdp. On the other hand, the level of exports of an economy and the changes in the Central Bank’s interest rate did not have statistically significant effects.