Hot money

Varadarajan Chari and Patrick Kehoe

No 228, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: Recent empirical work on financial crises documents that crises tend to occur when macroeconomic fundamentals are weak, but that even after conditioning on an exhaustive list of fundamentals, a sizable random component to crises and associated capital flows remains. We develop a model of herd behavior consistent with these observations. Informational frictions together with standard debt default problems lead to volatile capital flows resembling hot money and financial crises. We show that repaying debt during difficult times identifies a government as financially resilient, enhances its reputation and stabilizes capital flows. Bailing out governments deprives resilient countries of this opportunity.

Keywords: Capital movements; International finance (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (29)

Published in Journal of Political Economy (Vol. 111, No. 6, December 2003, pp. 1262-1292)

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Journal Article: Hot Money (2003)
Working Paper: Hot Money (2003)
Working Paper: Hot Money (1997)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:228

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