Discussion Paper Series 2005-E-15

Explaining the Real Exchange Rate during Sudden Stops and Tranquil Periods

Akiko Terada-Hagiwara

This paper untangles the causes behind real exchange rate devaluation events, with particular attention paid to the Sudden Stop of capital flows in the 1980s and 90s. Utilizing the cumulative impulse response function and variance decomposition analysis, we argue that there is an asymmetric response across Sudden Stop and tranquil periods. Further comparison across the Sudden Stop in the 80s ("debt crisis") and that in the 90s ("Sudden Stop crisis"), however, reveals that the Sudden Stop disturbance is more prominent in explaining the real exchange rate disturbance in the Sudden Stop crisis of the 1990s than the debt crisis of the 1980s.

Keywords: Real Exchange rate, Capital flows, Sudden Stop, Asia, Latin America

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2005 Bank of Japan All Rights Reserved.

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