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Capital Flow Sudden Stops, Exchange Rate Regimes and Economic Growth

【Authors】
LI Fang, LU Lu & LU Yiyang
【WorkUnit】
LI Fang, LU Lu (Zhongnan University of Economics & Law, 430073)
LU Yiyang (Vanderbilt University, 37235)
【Abstract】

Since 2007 capital flow sudden stops have been taking place in China more frequently and on larger scale which challenge the reform of exchange rate regime. Based on the annual data of 149 economies, this paper tests the economic impact of sudden stops on countries with different exchange arrangements. It is found that sudden stops do have a significant negative impact on a country's economic growth. However, different effects are associated with different exchange rate arrangements. In the case of sudden stop, the economies with less flexible exchange rate arrangements suffered less due to the lower inflation and more stable export. This founding provides empirical support for the countries return to pegged regimes when sudden stops occurred, and also important policy reference for China to deal with the shocks from sudden stop during the reform of increasing the elasticity of exchange rate regime.

JEL: F31, F43, G31

【KeyWords】
Capital Flow Sudden Stops, Exchange Rate Regimes, Economic Growth, Panel Model