Hot money
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.Download Info
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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 228.Length:
Date of creation: 2003
Date of revision:
Publication status: Published in Journal of Political Economy (Vol. 111, No. 6, December 2003, pp. 1262-1292)
Handle: RePEc:fip:fedmsr:228
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Keywords: Capital movements ; International finance;Other versions of this item:
- V. V. Chari & Patrick J. Kehoe, 2003. "Hot Money," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1262-1292, December.
- 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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