Heterogeneous impacts of sudden stops of international capital flows on economic growth

Abstract

AbstractThis paper empirically examines the heterogeneous impacts of sudden stops in international capital flows on economic growth. We identified 24 sudden stop episodes since 1990 and employed a counterfactual method with cross‐economy panel data to evaluate the impact of each episode on economic growth. The results indicate that 14 sudden stop episodes triggered significant economic decline, with varying magnitudes; 9 episodes were accompanied by insignificant economic downturn, and 1 episode was followed by economic growth. We further utilize the treatment effect derived from the counterfactual analysis to investigate the causes of these heterogeneous impacts of sudden stops on economic growth. Results obtained from the panel data model suggest that external debt, financial development, and real investment return are the main driving forces contributing to the observed heterogeneity.