AbstractRecent empirical work on financial crises documents that crises tend to occur when macroeconomic fundamentals are weak; but 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 the opportunity to differentiate themselves from the nonresilient.
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Bibliographic InfoArticle provided by University of Chicago Press in its journal Journal of Political Economy.
Volume (Year): 111 (2003)
Issue (Month): 6 (December)
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Web page: http://www.journals.uchicago.edu/JPE/
Other versions of this item:
- V.V. Chari & Patrick J. Kehoe, 2003. "Hot money," Staff Report 228, Federal Reserve Bank of Minneapolis.
- V. V. Chari & Patrick J. Kehoe, 2003. "Hot Money," Levine's Bibliography 506439000000000415, UCLA Department of Economics.
- V. V. Chari & Patrick Kehoe, 1997. "Hot Money," NBER Working Papers 6007, National Bureau of Economic Research, Inc.
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