This paper analyzes the dynamics of sectoral Real Gross Value Added (RGVA) around
sudden stops in foreign capital inflows. We identify sudden stop episodes statistically
from changes in gross capital inflows from the financial account. In the baseline
specification, we estimate changes in the growth rate of sectoral RGVA during sudden
stops and in the few quarters preceding and following them. We also look at whether
real exchange rate movements and the depth of the RGVA decline on impact explain different
sectoral dynamics afterwards. In an additional exercise, we analyze deviations from
the sectors’ long-run growth path. Our findings indicate that: (i) the construction
sector experiences the largest drop in its growth rate during sudden stops; (ii) generally,
tradable sectors, especially manufacturing, face larger damages during sudden stops
than nontradable sectors, but they decelerate less in the medium run than some service
sectors; (iii) the depth of the initial slowdown is related to a more favorable subsequent
performance (a rebound effect), while we find only very weak evidence that real exchange
rate depreciations facilitate adjustment. Overall, our results suggest a prolonged
reallocation of economic activity away from service sectors, towards the production
of goods. This is consistent with a traditional view of the role of tradable and nontradable
sectors in a sudden stop episode.
