The conventional wisdom is that capital flows between developing countries and developed countries are more volatile than can be justified by fundamentals. In this paper we construct a simple model in which frictions in international financial markets in combination with standard debt-default problems lead to volatile capital flows. These flows act as tests of fire for borrowing countries. If a country survives this test, its reputation is enhanced and future capital flows become less volatile. Failing this test is associated with a loss of reputation and a decline in the amount of capital flows.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
6007.
Length: Date of creation: Apr 1997 Date of revision: Handle: RePEc:nbr:nberwo:6007
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Article
V. V. Chari & Patrick J. Kehoe, 2003.
"Hot Money,"
Journal of Political Economy,
University of Chicago Press, vol. 111(6), pages 1262-1292, December.
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Paper
V.V. Chari & Patrick J. Kehoe, 2003.
"Hot money,"
Staff Report
228, Federal Reserve Bank of Minneapolis.
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V. V. Chari & Patrick J. Kehoe, 2003.
"Hot Money,"
Levine's Bibliography
506439000000000415, UCLA Department of Economics.
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Find related papers by JEL classification: F0 - International Economics - - General F3 - International Economics - - International Finance
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