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Modering Financial Fragility In Transition Economies

Jeffrey Nilsen () and Riccardo Rovelli ()

No 99.03, Working Papers from Swiss National Bank, Study Center Gerzensee

Abstract: 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
Date: 1999-07
New Economics Papers: this item is included in nep-fmk
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