Long-run growth in Latin America over the last 50 years has been low and volatile in the presence of frequent Sudden Stops. We develop a theory that links long-run growth, financial frictions, and Sudden Stops in Emerging countries. Our theory exploits the fact that reversals in trade balance during Sudden Stops occur through sharp declines in imports, particularly of imported investment, rather than increases in exports. Imported investment, in turn, has a permanent impact on economic growth. We find that trend growth deteriorates during Sudden Stops and, even though trend shocks play a crucial role, financial frictions and shocks have a significant impact on its dynamics. We apply our model to the Sudden Stops in Argentina since the 1950s and find that financial crises have a strong permanent effect on the trend. Hence, to a large extent, the trend is the cycle.
This is a joint work with Florencia S. Airaudo.