Sudden Stop (economics) - Policy Measures

Policy Measures

Regarding policy measures adopted during sudden stop episodes, the massive slowdown in capital inflows, usually presented as large capital outflows, can be counteracted by exchange rate devaluation, loss of international reserves and/or increases in real interest rates. The nominal exchange rate behavior during most sudden stop episodes show that sudden stops in emerging markets are followed by a devaluation of the domestic currency, while most depreciation episodes in developed countries are not related to sudden stop phases. Real interest rates sharply increase during sudden stop episodes, especially in the case of emerging market economies. A sharp loss of international reserves is also observed during sudden stop episodes, both in developed countries and emerging markets. The current account balance shows a sharp reduction in current account deficits, with a significantly higher increase in the current account balance in emerging markets.