From abnormal FDI to a normal driver of sudden stop episodes

In this paper we study role of ‘abnormal FDI‘ as a potential driver of sudden stops during the 2009-2019 period. The unexplained part of country fixed effects in a bilateral gravity regression is used to calculate the abnormal FDI. We then construct three measures of ‘FDI abnormalcy‘ that assess: i) the possible role of an economy as financial centre or tax haven, ii) the contribution of ‘FDI abnormalcy‘ to total FDI position, and iii) the exposure toward territories considered as tax havens or financial centres. Determinants of sudden stops are analysed by the panel probit model. We find that economies labelled as tax havens or financial centres and economies with comparably higher shares of inward ‘abnormal FDI’ were associated with a lower incidence of sudden stops. In contrast, the presence of capital inflows linked to tax haven or financial centre territories may increase the likelihood of a sudden stop event.