Investor Risk Aversion and Financial Fragility in Emerging Economies
Bank intermediated short-term capital inflows play a crucial role in the financial structure of many emerging economies. Yet since these funds are subject to the risk of early withdrawal, an excessive reliance on this financing is often associated with a financial or currency crisis. We model a situation where withdrawals are motivated by a change in either the domestic or foreign fundamentals. We show that, for a given change in fundamentals, a sudden reversal in the capital flows, and hence a financial crisis, is more likely the more risk averse are the foreign investors. We also show that a policy to tax early withdrawals may discourage the inflows more likely to cause fundamental runs, as it prevents the relatively more risk averse investors from investing. However, the policy must be fine-tuned to avoid discouraging all capital inflows.
|Date of creation:||2000|
|Date of revision:|
|Contact details of provider:|| Postal: Piazza Scaravilli, 2, and Strada Maggiore, 45, 40125 Bologna|
Phone: +39 051 209 8019 and 2600
Fax: +39 051 209 8040 and 2664
Web page: http://www.dse.unibo.it
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Sebastian Edwards, 1999.
"How Effective are Capital Controls?,"
NBER Working Papers
7413, National Bureau of Economic Research, Inc.
- Alonso, Irasema, 1996. "On avoiding bank runs," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 73-87, February.
- Barry Eichengreen & Andrew K. Rose, 1998.
"Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises,"
NBER Working Papers
6370, National Bureau of Economic Research, Inc.
- Eichengreen, Barry & Rose, Andrew K, 1998. "Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises," CEPR Discussion Papers 1828, C.E.P.R. Discussion Papers.
- Roberto Chang & Andres Velasco, 1998.
"Financial Fragility and the Exchange Rate Regime,"
NBER Working Papers
6469, National Bureau of Economic Research, Inc.
- Chang, R. & Velasco, A., 1998. "Financial Fragility and the Exchange Rate Regime," Working Papers 98-05, C.V. Starr Center for Applied Economics, New York University.
- Roberto Chang & Andres Velasco, 1997. "Financial fragility and the exchange rate regime," FRB Atlanta Working Paper 97-16, Federal Reserve Bank of Atlanta.
- Chang, Roberto & Velasco, Andres, 2000. "Banks, debt maturity and financial crises," Journal of International Economics, Elsevier, vol. 51(1), pages 169-194, June.
- 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, vol. 18(4), pages 619-635, August.
- Reinhart, Carmen & Montiel, Peter, 1999. "Do capital controls influence the volume and composition of capital flows? Evidence from the 1990s," MPRA Paper 13710, University Library of Munich, Germany.
- Dani Rodrik & Andres Velasco, 1999. "Short-Term Capital Flows," NBER Working Papers 7364, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:bol:bodewp:380. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dipartimento Scienze Economiche, Universita' di Bologna)
If references are entirely missing, you can add them using this form.