Emerging economies with open capital accounts are highly vulnerable to global shifts in investor sentiment. A sudden reversal of capital flows can trigger a financial crisis.

A Sudden Stop occurs when foreign investors abruptly halt lending and liquidate their domestic investments, often driven by rising interest rates in major economies like the United States:

[Global Yields Spike] ---> Sudden Stop Inflows ---> Capital Flight Surge ---> Local Exchange Rate Collapses ---> Debt Defaults

To defend the domestic economy during a sudden stop, central banks implement Capital Controls. These measures include levying taxes on short-term capital withdrawals, blocking citizens from converting large volumes of local currency into foreign assets, and imposing holding periods on foreign investments. These boundaries help stabilize the exchange rate and allow the central bank to maintain an independent monetary policy focused on domestic recovery.