ABSTRACT Title of dissertation: ESSAYS ON PREVENTING SUDDEN STOPS

Capital markets have witnessed a rash of ‘Sudden Stops ’ during the last decade. Policy proposals to prevent these crises include creating indexed bond markets and providing price guarantees for emerging market assets. Chapter 1 explores the macroeconomic implications of indexed bonds with a return indexed to the key variables driving emerging market economies such as terms of trade or productivity. We employ a quantitative model of a small open economy in which Sudden Stops are driven by the financial frictions inherent to world capital markets. While indexed bonds provide a hedge to income fluctuations and can undo the effects of financial frictions, they lead to interest rate fluctuations. Due to this tradeoff, there exists a non-monotonic relation between the “degree of indexation ” (i.e., the percentage of the shock reflected in the return) and the overall effects of these bonds on macroe-conomic fluctuations. Therefore, indexation can improve macroeconomic conditions only if the degree of indexation is less than a critical value. When the degree of indexation is higher than this threshold, it strengthens the precautionary savings motive, increases consumption volatility and impact effect of Sudden Stops. Th