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Good News, Leverage, and Sudden Stops

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Abstract

One of the major debates in open economy macroeconomics is the extent to which capital inflows are beneficial for growth. In principle, these flows allow countries to increase their consumption and investment spending beyond their income by enabling them to tap into foreign saving. Periods of such borrowing, however, are associated with large trade deficits, external debt accumulation, and, in some cases, overheating when these economies operate beyond their potential output level for an extended period of time. The relevant question in this context is whether the rate at which a country is taking on external debt has useful predictive information about financial crises.

Suggested Citation

  • Ozge Akinci & Ryan Chahrour, 2018. "Good News, Leverage, and Sudden Stops," Liberty Street Economics 20180530, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:87260
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    File URL: https://libertystreeteconomics.newyorkfed.org/2018/05/good-news-leverage-and-sudden-stops.html
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    More about this item

    Keywords

    Boom-Bust Cycle; Sudden Stops; Leverage; News Shocks;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G01 - Financial Economics - - General - - - Financial Crises

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