Sudden Stops

Highlights of recent NBER forum on research on the global financial crisis

RT @davidwessel, via DeLong Twitterstorm

The last panel looks interesting:

Reducing Country Vulnerability: Capital Controls, Reserves, the IMF, or Something New?

Jeffrey Frankel introduced the final panel. Over the past few decades, countries have relied more heavily on large emergency lending packages to stabilize economies during crises. As the size of the packages increases and contagion has become more virulent, this approach is becoming increasing costly. This panel explored options to reduce country vulnerability. Dominguez, Hashimoto, and Ito show that having measured reserves after appropriately adjusting for exchange rate movements and emergency assistance packages, they served as an important counter-cyclical policy tool for a number of emerging markets during the crisis. Chamon, Ghosh, Ostry, and Qureshi find that certain types of prudential regulations and capital controls can help to strengthen a country's liability structures and to restrain overall credit booms. They show that this helped to stabilize output declines during the crisis. Barkbu, Eichengreen and Mody argue that more innovative approaches need to be considered and they focused in particular on "sovereign cocos": contingent debt securities that automatically reduce payment obligations in the event of debt-sustainability problems.

Zanny Minton-Beddoes chaired the final discussion in which Erdem Basci stressed the importance of exchange rate flexibility, moving towards the greater use of equity-like contracts to share risks, and reducing currency exposure, to stabilize countries during a crisis. He also discussed the measures undertaken by Turkey to manage capital flows, highlighting the innovative use of volatile interest rates, and argued that because of its successful policy management, Turkey did not need to use capital controls. Olivier Blanchard reminded us of the challenges of large capital inflows-from bubbles and overheating to "sudden stops". He suggested that value of more borrowing in domestic currency and macro-prudential measures in response to these inflows-which would include a continuum of measures ranging from domestic macro-prudential measures to broad capital controls aimed directly at foreigners. He questioned the effectiveness of reserve accumulation. Kathryn Dominguez discussed the challenges in measuring reserve accumulation and the need to distinguish between passive valuation changes and active management of the assets. She showed that many countries depleted their reserves during the crisis and that this active management helped economies recover.
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