Sudden stop
Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT
Meaning
A sudden stop is an abrupt halt or reversal of capital inflows into an economy. Foreign money that was coming in stops coming, or starts leaving. The country then cannot finance its current account deficit (CAD) easily. This usually forces a sharp fall in the currency and a loss of output. Economies that depend on hot money, meaning short-term speculative flows, are most at risk.
Example
In the 2013 taper tantrum, the US Fed hinted that it would slow its bond purchases, and money left emerging markets. India was named among the "Fragile Five", and the rupee fell to about ₹68.8/$ in August 2013. India responded with an FCNR(B) swap window that raised about US$34 bn, and with curbs on gold imports.
Don't confuse with
- Capital flight: this is a fear-driven outflow caused by problems at home, often led by residents. A sudden stop is foreign inflows drying up, often because of a global shock.
Related concepts
- Foreign exchange reserves
- Gold reserves
- Import cover
- Hot money
- Capital flight
- Currency swap arrangement