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Short-Term Capital Flows

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  • Dani Rodrik
  • Andres Velasco

Abstract

We provide a conceptual and empirical framework for evaluating the effects of short-term capital flows. A simple model of the joint determination of the maturity and cost of external borrowing highlights the role played by self-fulfilling crises. The model also specifies the circumstances under which short-term debt accumulation is socially excessive. The empirical analysis shows that the short-term debt to reserves ratio is a robust predictor of financial crises, and that greater short-term exposure is associated with more severe crises when capital flows reverse. Higher levels of M2/GDP and per-capita income are associated with shorter-term maturities of external debt. The level of international trade does not seem to have any relationship with levels of short-term indebtedness, which suggests that trade credit plays an insignificant role in driving short-term capital flows. Our policy analysis focuses on ways in which potential illiquidity can be avoided.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7364.

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Date of creation: Sep 1999
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Publication status: published as Pleskovic, Boris and Joseph E. Stiglitz. Annual World Bank Conference on Development Economics. Washington, D.C.: World Bank, 2000.
Handle: RePEc:nbr:nberwo:7364

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  1. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
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  3. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, Springer, vol. 6(4), pages 459-472, November.
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  10. Jason Furman & Joseph E. Stiglitz, 1998. "Economic Crises: Evidence and Insights from East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 1-136.
  11. Sebastian Edwards, 2000. "Capital Flows, Real Exchange Rates, and Capital Controls: Some Latin American Experiences," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 197-246 National Bureau of Economic Research, Inc.
  12. Roberto Chang & Andres Velasco, 1998. "Financial crises in emerging markets: a canonical model," Working Paper, Federal Reserve Bank of Atlanta 98-10, Federal Reserve Bank of Atlanta.
  13. Guillermo Le Fort & Carlos Budnevich, 1996. "Capital Account Regulations and Macroeconomic Policy: Two Latin American Experiences," Economics Working Paper Archive wp_162, Levy Economics Institute.
  14. Eichengreen, Barry & Rose, Andrew K, 1998. "Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1828, C.E.P.R. Discussion Papers.
  15. Montiel, Peter & Reinhart, Carmen M., 1999. "Do capital controls and macroeconomic policies influence the volume and composition of capital flows? Evidence from the 1990s," Journal of International Money and Finance, Elsevier, Elsevier, vol. 18(4), pages 619-635, August.
  16. Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90.
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  18. Feldstein, Martin, 1999. "A Self-Help Guide for Emerging Markets," Scholarly Articles 2961700, Harvard University Department of Economics.
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