Research Of Sudden Stops In Emerging Market Countries

The current world pattern is facing a change.Due to the strengthening of economic strength,there are more and more oversea investment from emerging market countries.In the past,people thought that big country's monetary policy adjustment or the international financial crisis was the cause of large reduction of capital inflows in emerging market countries(called as “sudden stops” academically),but economic fundamentals can also cause cross-border capital flows from emerging market countries to developed countries,and the latter phenomenon is gradually increasing.This new trend of sudden stops in emerging market countries and their positive effects on the economic growth of emerging market countries have aroused great interest in academia.In this context,this study differentiates the investment behaviors of resident and nonresident as the starting point,and re-examines the determinants,influences and policy response of sudden stops in emerging market countries.Early study about sudden stops insist that sudden stops reflect foreign investors' investment reduction or withdrawal in emerging market countries,and the experience of the Latin American financial crisis and the Asian financial crisis in 1980 s and1990s made people realize that,capital flight by resident can also lead to sudden stops,as a result,the connotation of the sudden stops is expanded.After the expansion of connotation,sudden stops are still thought of as a negative thing.Due to the fast and steady economic growth of emerging market countries,the meaning of sudden stops need to be further expanded.This is because,in the pursuit of profit and new economic growth motivation,emerging market countries also raised oversea investment,the large-scale increase in oversea investment cannot be defined as capital flight obviously.In view of this,this study divides the sudden stops in emerging market countries into two categories: non-resident driven sudden stops and resident driven sudden stops.Non-resident driven sudden stops are caused by a significant reduction in gross capital inflows,and resident driven sudden stops are caused by a substantial increase in gross capital outflows,and the latter is not fully represented as capital flight.Since the sudden stops in emerging market countries have different types,are there differences in the determinants of non-resident driven and resident driven sudden stops? Through empirical analysis of the quarterly data on capital flows of 39 emerging market countries from 1998 to 2017,this study found that non-resident driven sudden stops in emerging market countries are more sensitive to global factors such as global interest rate,whereas the resident driven sudden stops in emerging market countries are more affected by domestic factors.Among the domestic factors,the increase of domestic economic growth rate and the expansion of current account surplus even increase the probability of resident driven sudden stops,which indicates that the resident driven sudden stops may not be capital flight.In order to verify this point,this study analyze the structural components of resident driven sudden stops under different level of international financial market risk using panel smooth transition regression model.The results show that when international financial markets risk is high,resident driven sudden stops are mainly reflected in the substantial increase in short-term foreign investment,but when international financial markets risk is low,the main components of resident driven sudden stops are foreign direct investment.The short-term foreign investment is more speculative,while the foreign direct investment value the long-term investment return.Based on this,this study believes that the resident driven sudden stops in emerging market countries are not all capital flight in the purpose of risk aversion,sometimes resident driven sudden stops show the increased willingness of oversea investment by emerging market countries.This conclusion is also one of the main innovation of this study.Now that the non-resident driven sudden stops and resident driven sudden stops in emerging market countries have different nature,so are the effects of the two types sudden stops different? To answer this question,this study first analyzes the impact of the different types of sudden stops on emerging market countries' economic growth.It turns out that the non-resident driven sudden stops reduce domestic economic growth,while resident driven sudden stops do not reduce domestic economic growth,and even promote domestic economic growth.This is because when non-resident driven sudden stops occur,the short-term capital flows of emerging market countries reduced greatly,resulting in insufficient investment funds,and domestic enterprises and residents are forced to deleverage,what's more,domestic currency depreciation accompanied with non-resident driven sudden stops increase the debt burden of emerging market countries.On the other hand,resident driven sudden stops,in the current world economy,are often manifested by a sharp increase of foreign direct investment in emerging market countries.While emerging market countries' resident invest oversea,non-resident also purchase emerging market countries assets.This two-way cross-border capital flows just reflect the vitality of economic development in emerging market countries.The analysis of why resident driven sudden stops promote economic growth in emerging market countries is one of the marginal contributions of this study.In addition to economic growth,this study also analyzes whether sudden stops in emerging market countries inevitably lead to currency crises.The empirical results show that the probability of a currency crisis caused by sudden stops is less than 50%,and higher level of foreign exchange reserve scale,financial development,trade openness and stronger capital control can help prevent currency crisis followed by sudden stops.Under different exchange rate regimes,the increase in the size of foreign exchange reserves is conducive to the stability of exchange rate in emerging market countries.However,whether the sudden stops are accompanied by the occurrence of currency crisis depends not only on the scale of foreign exchange reserves,but also on the willingness of using foreign reserves to stabilize the exchange rate.In addition,the classification study on the sudden stops in emerging market countries shows that non-resident driven sudden stops are often accompanied by currency crises,while there is no significant relationship between resident driven sudden stops and currency crisis.Based on the nature of different types of sudden stops in emerging market countries and their different impact on domestic economic growth and currency cresis,this study insists that it is unnecessary to regulate all types of sudden stops.However,the results of the investigation on the status of capital outflow control in emerging market countries show that emerging market countries have implemented an indiscriminate capital outflow control policy for non-resident driven and resident driven sudden stops,which indicates that emerging market countries have an insufficient understanding about different types of sudden stops,especially the resident driven sudden stops,so the capital outflow control policy needs to be improved in emerging market countries.