Monetary And Fiscal Policies In A Sudden Stop: Is Tighter Brighter?

The design of optimal policy responses to adverse capital account shocks during periods of global capital market turmoil (i.e., skyrocketing bond spreads and a sharp retrenchment in capital inflows or Sudden Stop) has been the source of a lively debate, particularly at the time of the Tequila, the Asian and Russian crises, when IMF policies calling for monetary and fiscal restraint in the face of external crises became strongly questioned. Should a country facing a sudden stop tighten its fiscal and monetary policies? Or conversely, should it relax those policies in order to attenuate the output contraction that typically occurs during these events?