Financial fragility in small open economies: firm balance sheets and the sectoral structure

Yannick Kalantzis

Working papers from Banque de France

Abstract: Episodes of large capital inflows in small open economies are often associated with a shift of resources from the tradable to the non-tradable sector and sometimes lead to balance-of-payments crises. This paper builds a two-sector dynamic model to study the evolution of the sectoral structure and its impact on financial fragility. The model embeds a static mechanism of balance-of-payments crisis which produces multiple equilibria within a single time period when the non-tradable sector is large enough compared to the tradable sector. The paper studies the dynamics induced by an increase in financial openness. It shows that the relative size of the non-tradable sector overshoots, which makes the economy more likely to be financially fragile during the transitory dynamics. Using an extended version of the model, the paper conducts a quantitative analysis and shows that this mechanism accounts well for several episodes of large capital inflows that led to financial crises.

Keywords: two-sector models; capital account liberalization; balance-of-payments crises; foreign currency debt; borrowing constraint; euro area crisis. (search for similar items in EconPapers)
JEL-codes: E44 F32 F34 F43 O41 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2014
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
https://publications.banque-france.fr/sites/defaul ... g-paper_505_2014.pdf (application/pdf)

Related works:
Journal Article: Financial Fragility in Small Open Economies: Firm Balance Sheets and the Sectoral Structure (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:505

Access Statistics for this paper

More papers in Working papers from Banque de France Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS. Contact information at EDIRC.
Bibliographic data for series maintained by Michael brassart ().