The dynamic consequences of inflow-driven Sudden Stops on economic growth

This thesis studies the effects of sudden stops (an unexpected cut-off in international capital flows) on economic growth worldwide from 1990 to 2021. For this purpose, the thesis has set two objectives. Firstly, following the typology of Cavallo et. al. (2013), the thesis carries out an updated study of different types of sudden stops that have occurred in this period. Secondly, the thesis focuses on two specific types of shocks: sudden stops in gross inflows (SSI) and sudden stops in gross inflows that are also sudden stops in net flows (SSIN), given their major effects on economic growth. The goal is to understand the transmission channel through which these types of shocks affect economic growth over time. This implies the use of methodological innovations to understand the dynamic consequences of these shocks on GDP growth. In general terms, our results suggests that during the last decade, sudden stops come back to 1990’s trends. This means that net sudden stops gained prevalence in developing economies and gross sudden stops gained prevalence in developed economies. Regarding the effects of inflow-driven sudden stops on GDP, SSIN are effectively the most disruptive shocks, but SSI also show significant effects. The transmission mechanism differs between the two shocks. The former involves a forced adjustment of the current account, while the latter involves a process of forced deleveraging.