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Do Surges in International Capital Inflows Influence the Likelihood of Banking Crises?: Cross-Country Evidence on Bonanzas in Capital Inflows and Bonanza-Boom-Bust Cycles

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  • Julián Caballero

Abstract

This paper asks whether bonanzas (surges) in net capital inflows increase the probability of banking crises and whether this is necessarily through a lending boom mechanism. A fixed effects regression analysis indicates that a baseline bonanza, identified as a surge of one standard deviation from trend, increases the odds of a banking crisis by three times, even in the absence of a lending boom. Thus, a bonanza raises the likelihood of a crisis from an unconditional probability of 4.4 percent to 12 percent. Larger windfalls of capital (two-s.d. bonanzas) increase the odds of a crisis by eight times. The joint occurrence of a bonanza and a lending boom raises these odds even more. Decomposing flows into FDI, portfolio-equity and debt indicates that bonanzas in all flows increase the probability of crises when the windfall takes place jointly with a lending boom. Thus, windfalls in all types of flows exacerbate the deleterious effects of credit. However, surges in portfolio-equity flows seem to have an independent effect, even in the absence of a lending boom. Furthermore, emerging economies exhibit greater odds of crises after a windfall of capital.

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Paper provided by Inter-American Development Bank in its series IDB Publications with number 71178.

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Date of creation: May 2012
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Handle: RePEc:idb:brikps:71178

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Keywords: Financial Sector; Financial Crises & Economic Stabilization;

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Cited by:
  1. Peter Montiel, 2014. "Capital Flows: Issues and Policies," Open Economies Review, Springer, Springer, vol. 25(3), pages 595-633, July.
  2. Joshua Aizenman & Vladyslav Sushko, 2011. "Capital Flow Types, External Financing Needs, and Industrial Growth: 99 countries, 1991-2007," NBER Working Papers 17228, National Bureau of Economic Research, Inc.
  3. Peter J. Montiel, 2013. "Capital Flows: Issues and Policies," IDB Publications 82145, Inter-American Development Bank.
  4. Castroa, Vitor & Kubota, Megumi, 2013. "Duration dependence and change-points in the likelihood of credit booms ending," Policy Research Working Paper Series 6475, The World Bank.
  5. Calderon, Cesar & Kubota, Megumi, 2012. "Gross inflows gone wild : gross capital inflows, credit booms and crises," Policy Research Working Paper Series 6270, The World Bank.

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