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Hot Money

  • V. V. Chari
  • Patrick Kehoe

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.

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Date of creation: Apr 1997
Date of revision:
Publication status: published as Chari, V.V. and Patrick J. Kehoe. "Hot Money," Journal of Political Economy, 2003, v111(6,Dec), 1262-1292.
Handle: RePEc:nbr:nberwo:6007
Note: IFM
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