Sudden Stops and Financial Frictions : Evidence from Industry Level Data
The nature of the microeconomic frictions that transform sudden stops in output collapses is not only of academic interest, but also crucial for the correct design of policy responses to prevent and address these episodes and the lack of evidence o...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110322080205 http://hdl.handle.net/10986/3371 |
| Summary: | The nature of the microeconomic
frictions that transform sudden stops in output collapses is
not only of academic interest, but also crucial for the
correct design of policy responses to prevent and address
these episodes and the lack of evidence on this regard is an
important shortcoming. This paper uses industry-level data
in a sample of 45 developed and emerging countries and a
differences-in-differences methodology to provide evidence
of the role of financial frictions for the consequences of
sudden stops. The results show that, consistently with
financial frictions being important, industries that are
more dependent on external finance decline significantly
more during a sudden stop, especially in less financially
developed countries. The results are robust to controlling
for other possible mechanisms, including labor market
frictions. The paper also provides results on the role of
comparative advantage during sudden stops and on the
usefulness of various policy responses to attenuate the
consequences of these shocks. |
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