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Episodes of Large Capital Inflows and the Likelihood of Banking and Currency Crises and Sudden Stops

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  • Davide Furceri
  • Stéphanie Guichard
  • Elena Rusticelli

Abstract

This paper provides an empirical investigation of the relationship between surges in capital inflows and the probability of subsequent banking, currency and balance-of-payment crises. Using a panel of developed and emerging economies from 1970 to 2007, it is shown that a large capital inflow episode increases substantially the probability of having a banking or a currency crisis in the two following years. The effect is especially large for the case of balance-of-payment crises. The paper also finds that the effect of large capital inflows is different depending on the type of flows characterising the episode. In particular, large capital inflows that are debt-driven significantly increase the probability of banking, currency and balance of payment crises, whereas if inflows are driven by equity portfolio investment or FDI there is a negligible effect. This means that structural reforms that modify the composition of capital flows towards a lower share of debt are likely to reduce the financial vulnerabilities to large capital inflows. At the same time, however, structural reforms may also increase the overall size of capital flows. Épisodes d'entrées massive de capitaux et risqué de crises bancaires et de changes et d'arrêt brutal du financement extérieur Ce document presente une etude empirique de la relation entre les fortes entrees de capitaux et la probabilite de crises bancaires, financiere ou de balance des paiements ulterieures. Les resultats obtenus sur un panel d'economies developpees et emergentes de 1970 a 2007 suggerent que les episodes de fortes entrees de capitaux ou ¡ìmannes¡í augmentent fortement la probabilite d'avoir une crise bancaire ou une crise de change dans les deux annees suivantes. L'effet est particulierement grand pour les crises de balance des paiements. Le document montre egalement que l'effet des mannes de capitaux est different selon le type de flux de capitaux qui les caracterisent. En particulier les mannes de dette augmentent de maniere tres significative la probabilite de crise bancaire, de change et de balance des paiements, alors que les mannes d.investissements de portefeuille en actions et de l'IDE ont un effet negligeable. Cela signifie que les reformes structurelles qui modifient la composition des flux de capitaux vers une plus faible part de la dette sont susceptibles de reduire la vulnerabilite financiere associee aux larges entrees de capitaux. Toutefois, les reformes structurelles risquent aussi d.augmenter le montant total the flux de capitaux.

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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 865.

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Date of creation: 18 May 2011
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Handle: RePEc:oec:ecoaaa:865-en

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Keywords: banking crisis; financial crisis; capital flows; sudden stops; flux de capitaux; crise financière; crise bancaire; arrêt brutal des entrées de capitaux;

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Citations

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Cited by:
  1. Rakesh Mohan & Michael Debabrata Patra & Muneesh Kapur, 2013. "The International Monetary System: Where Are We and Where Do We Need to Go?," IMF Working Papers 13/224, International Monetary Fund.
  2. Davide Furceri & Stéphanie Guichard & Elena Rusticelli, 2011. "The Effect of Episodes of Large Capital Inflows on Domestic Credit," OECD Economics Department Working Papers 864, OECD Publishing.
  3. Rudiger Ahrend & Antoine Goujard, 2012. "International Capital Mobility and Financial Fragility - Part 1. Drivers of Systemic Banking Crises: The Role of Bank-Balance-Sheet Contagion and Financial Account Structure," OECD Economics Department Working Papers 902, OECD Publishing.
  4. Margit Molnar & Yusuke Tateno & Amornrut Supornsinchai, 2013. "Capital Flows in Asia-Pacific: Controls, Bonanzas and Sudden Stops," OECD Development Centre Working Papers 320, OECD Publishing.
  5. Rudiger Ahrend & Antoine Goujard & Cyrille Schwellnus, 2012. "International Capital Mobility: Which Structural Policies Reduce Financial Fragility?," OECD Economic Policy Papers 2, OECD Publishing.
  6. Julian Caballero, 2012. "Banking Crises and Financial Integration," Research Department Publications 4816, Inter-American Development Bank, Research Department.
  7. Forster , Katrin & Vasardani, Melina A. & Ca' Zorzi, Michele, 2011. "Euro area cross-border financial flows and the global financial crisis," Occasional Paper Series 126, European Central Bank.
  8. Julian Caballero, 2012. "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," Research Department Publications 4775, Inter-American Development Bank, Research Department.
  9. Andrew Powell & Pilar Tavella, 2012. "Capital Inflow Surges in Emerging Economies: How Worried Should LAC Be?," Research Department Publications 4782, Inter-American Development Bank, Research Department.
  10. Ostry, Jonathan D. & Ghosh, Atish R. & Chamon, Marcos & Qureshi, Mahvash S., 2012. "Tools for managing financial-stability risks from capital inflows," Journal of International Economics, Elsevier, vol. 88(2), pages 407-421.
  11. Furceri, Davide & Zdzienicka, Aleksandra, 2012. "Banking Crises and Short and Medium Term Output Losses in Emerging and Developing Countries: The Role of Structural and Policy Variables," World Development, Elsevier, vol. 40(12), pages 2369-2378.

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