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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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  • Julian Caballero

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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, Research Department in its series Research Department Publications with number 4775.

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Date of creation: May 2012
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Handle: RePEc:idb:wpaper:4775

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Cited by:
  1. Peter J. Montiel, 2013. "Capital Flows: Issues and Policies," IDB Publications 82145, Inter-American Development Bank.
  2. Vítor Castro & Megumi Kubota, 2013. "Duration dependence and change-points in the likelihood of credit booms ending," NIPE Working Papers 09/2013, NIPE - Universidade do Minho.
  3. Aizenman, Joshua & Sushko, Vladyslav, 2011. "Capital Flow Types, External Financing Needs, and Industrial Growth: 99 countries, 1991-2007," Santa Cruz Department of Economics, Working Paper Series qt3fb716f8, Department of Economics, UC Santa Cruz.
  4. 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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