| Abstract: |
This paper investigates the possible negative effect of external crises,
sudden stops in capital flows and currency crises in emerging market
economies. We find that a current account reversal has an important effect,
both direct and indirect, on economic growth, and depresses GDP by about 1
percentage point in the current year, when using a broad group of emerging
markets. On the other hand, currency crises themselves, identified as a sharp
depreciation, do not appear to have a significant direct impact on growth.
Their overall effect on growth is positive, though rather insignificant from
an economic point of view. The joint occurrence of the currency crisis and the
current account reversal appears to be the most damaging event for economic
growth. Both the direct and compounded effects are about 5 times larger than
those of the reversal in the current year. The estimated cumulative losses for
current account reversals and the joint crisis are 2 and 21 percentage points,
respectively. The time necessary for the adjustment of actual growth back to
its equilibrium rate is roughly 2.5 years after the current account reversal
and 6.5 years after the joint occurrence of the currency crisis and the
reversal. |