Calvo

Question 1

Main observations (Non-monetary)

Answer 1

1. The larger the share of consumption of tradables, the more damage to the real economy from a fall in CAD
2. The shorter the residual maturity structure of a country’s debt, the more fertile will be the ground for a sudden stop

Question 2

Reasons of sudden stop

Answer 2

1. The capital inflows slowdown could push the economy into insolvency
2. APK and MPK decline as a result of socially costly bankruptcy and largely unexpected changes in relative prices.

Question 3

Monetary Approach

Answer 3

KI=CAD+RA
RA: International reserve
1. If K out is widespread monetary policy ineffective, demand must be controlled.
2. IMF: decrease G + tight MP; Calvo: decrease G but no tight MP
3. IMF: SR response=increase i to get foreign savings; Calvo: leads to weak structure