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Hot Money

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  • V. V. Chari
  • Patrick Kehoe

Abstract

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.

Suggested Citation

  • V. V. Chari & Patrick Kehoe, 1997. "Hot Money," NBER Working Papers 6007, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6007
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    JEL classification:

    • F0 - International Economics - - General
    • F3 - International Economics - - International Finance

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