Working Paper: CEPR ID: DP3757
Authors: Ashoka Mody; Mark P. Taylor
Abstract: We examine the determinants of capital flows to four developing countries during the 1990s using an explicitly disequilibrium econometric framework in which the supply and demand for capital are not necessarily equal, and the actual amount of the flow is determined by the ?short side? of the market. We are thus able to detect instances of ?international capital crunch? ? where capital flows are curtailed because of supply-side rationing ? and to relate these instances to movements in the underlying fundamentals. The analysis highlights the role of asymmetric information ? as distinct from the traditional concern with default risk ? in conditioning capital flows.
Keywords: asymmetric information; capital flows; disequilibrium; rationing
JEL Codes: F32; F34; O19
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| asymmetric information (D82) | capital flows (F32) |
| supply and demand for capital flows (F32) | capital rationing (G31) |
| default risk (G33) | supply and demand for capital flows (F32) |
| credit ratings (G24) | supply of capital (E22) |
| default risk (G33) | supply of capital (E22) |
| reserves relative to short-term debt (F34) | supply of capital (E22) |
| imports (F14) | demand for capital (E22) |
| spreads in emerging markets (F65) | demand for capital (E22) |
| financial crises (G01) | capital crunches (E51) |
| domestic and international economic conditions (F49) | probability of capital crunches (G01) |
| asymmetric information (D82) | capital flow dynamics (F32) |