Duration of sudden stop spells: A hazard model approach

• Published date: 01 February 2020
• DOI: http://doi.org/10.1111/roie.12443
• Author: Yu‐chin Chen,Mahama Samir Bandaogo
• Date: 01 February 2020

Rev Int Econ. 2020;28:105–118. wileyonlinelibrary.com/journal/roie

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© 2019 John Wiley & Sons Ltd

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INTRODUCTION

This paper studies the impact of foreign reserves on the conditional probability of exiting a period of

sudden stop of capital inflows. In particular, once a country is experiencing a sudden stop of capital

inflows, does the foreign reserve ratio to short debt play a role in how long it lasts? In general, we

study the determinants of the duration of sudden stop spells given that their average duration varies

across countries. For instance, the average duration of sudden stops, across our sample of emerging

economies, ranges from 2.7 to 6.5 quarters. Our interest in this question stems from the fact that sud-

den reversal in capital inflows remains a problem in emerging markets and their occurrence dampens

economic growth and increases macroeconomic imbalances. Understanding how to shorten their spell

would help to limit their negative impact on the economy (Mendoza, 2010), especially given that

emerging economies remain exposed to the risk of sudden stops owing to regional and global conta-

gion (Comelli, 2015; Eichengreen & Gupta, 2016). In addition, our study serves as empirical evidence

Received: 13 November 2018

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Revised: 2 July 2019

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Accepted: 31 July 2019

DOI: 10.1111/roie.12443

ORIGINAL ARTICLE

Duration of sudden stop spells: A hazard model

approach

Mahama SamirBandaogo1

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Yu‐chinChen2

1World Bank, Washington, DC

2University of Washington, Seattle,

Washington

Correspondence

Mahama Samir Bandaogo, The World

Bank, 1818 H Street, NW, Washington, DC

20433.

Email: mbandaogo@worldbank.org

Abstract

Using a hazard‐based duration model, we analyze the deter-

minants of the duration of a period of sudden stop, which

is defined as a drop in capital inflow by two standard de-

viations, for at least two consecutive quarters. The hazard

model estimates the conditional probability that the coun-

try exits the sudden stop today given that it experienced

one until the end of last period. We find that a higher ratio

of foreign exchange reserves to short‐term external debt

shortens the duration of sudden stops. We also find that a

higher global economic growth rate tends to shorten sud-

den stop spells. Our results are robust to various alternative

specifications.

JEL CLASSIFICATION

F31; F32; F41; F62