Modering Financial Fragility In Transition Economies
Jeffrey Nilsen () and
Riccardo Rovelli ()
No 99.03, Working Papers from Swiss National Bank, Study Center Gerzensee
Capital inflows have an enormous importance in the financing of investment in emerging and transition economies. However short-term inflows, intermediated by the banking sector of the emerging economy, may be subject to early withdrawals. We model a situation where such withdrawals are motivated by a change in either the domestic or the foreign fundamentals. We show that, for a given change in fundamentals, a reversal in the capital flows (and hence a currency crisis) is more likely the more risk averse are the foreign investors into the emerging economy. We also show that a policy to tax early withdrawals may discourage capital inflows which are more likely to give rise to fundamental runs, by helping to select relatively less risk averse investors. However, such a policy would have to be fine tuned in order not to discourage all capital inflows.
Keywords: Short-term capital inflows; Currency crisis; Financial Fragility; Chilean tax. (search for similar items in EconPapers)
JEL-codes: G21 G28 O16 O23 (search for similar items in EconPapers)
Pages: 38 pages
New Economics Papers: this item is included in nep-fmk
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