TY - JOUR
T1 - Hot money
AU - Chari, Varadarajan V
AU - Kehoe, Patrick J
N1 - Copyright:
Copyright 2008 Elsevier B.V., All rights reserved.
PY - 2003/12
Y1 - 2003/12
N2 - Recent empirical work on financial crises documents that crises tend to occur when macroeconomic fundamentals are weak; but even after conditioning on an exhaustive list of fundamentals, a sizable random component to crises and associated capital flows remains. We develop a model of herd behavior consistent with these observations. Informational frictions together with standard debt default problems lead to volatile capital flows resembling hot money and financial crises. We show that repaying debt during difficult times identifies a government as financially resilient, enhances its reputation, and stabilizes capital flows. Bailing out governments deprives resilient countries of the opportunity to differentiate themselves from the nonresilient.
AB - Recent empirical work on financial crises documents that crises tend to occur when macroeconomic fundamentals are weak; but even after conditioning on an exhaustive list of fundamentals, a sizable random component to crises and associated capital flows remains. We develop a model of herd behavior consistent with these observations. Informational frictions together with standard debt default problems lead to volatile capital flows resembling hot money and financial crises. We show that repaying debt during difficult times identifies a government as financially resilient, enhances its reputation, and stabilizes capital flows. Bailing out governments deprives resilient countries of the opportunity to differentiate themselves from the nonresilient.
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U2 - 10.1086/378525
DO - 10.1086/378525
M3 - Article
AN - SCOPUS:0942267283
SN - 0022-3808
VL - 111
SP - 1262
EP - 1292
JO - Journal of Political Economy
JF - Journal of Political Economy
IS - 6
ER -