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Short-Term Capital Flows

  • Dani Rodrik
  • Andres Velasco

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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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
Note: IFM
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. 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.
  2. Guillermo Le Fort V. & Carlos Budnevich L., 1998. "Capital Account Regulations and Macroeconomic Policy: Two Latin American Experiences," Macroeconomics 9807003, EconWPA.
  3. Jeffrey J. Frankel and Andrew K. Rose., 1996. "Currency Crashes in Emerging Markets: Empirical Indicators," Center for International and Development Economics Research (CIDER) Working Papers C96-062, University of California at Berkeley.
  4. 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.
  5. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "What caused the Asian currency and financial crisis?," Japan and the World Economy, Elsevier, vol. 11(3), pages 305-373, October.
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  7. Roberto Chang & Andres Velasco, 1998. "Financial Crises in Emerging Markets," NBER Working Papers 6606, National Bureau of Economic Research, Inc.
  8. 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.
  9. Sebastian Edwards, 1998. "Capital Flows, Real Exchange Rates, and Capital Controls: Some Latin American Experiences," NBER Working Papers 6800, National Bureau of Economic Research, Inc.
  10. Peter M. Garber, 1998. "Derivatives in International Capital Flows," NBER Working Papers 6623, National Bureau of Economic Research, Inc.
  11. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis? Part I: A Macroeconomic Overview," NBER Working Papers 6833, National Bureau of Economic Research, Inc.
  12. 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.
  13. Chang, R. & Velasco, A., 1999. "Liquidity Crises in Emerging Markets: Theory and Policy," Working Papers 99-14, C.V. Starr Center for Applied Economics, New York University.
  14. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, vol. 6(4), pages 459-472, November.
  15. Guillermo A. Calvo, 1995. "Varieties of Capital-Market Crises," Research Department Publications 4008, Inter-American Development Bank, Research Department.
  16. Roberto Chang & Andres Velasco, 1998. "Financial crises in emerging markets: a canonical model," Working Paper 98-10, Federal Reserve Bank of Atlanta.
  17. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  18. Feldstein, Martin, 1999. "A Self-Help Guide for Emerging Markets," Scholarly Articles 2961700, Harvard University Department of Economics.
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