Working Paper: NBER ID: w7364
Authors: Dani Rodrik; Andrés Velasco
Abstract: 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.
Keywords: No keywords provided
JEL Codes: F3; F4; E3; E4; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| short-term debt to reserves ratio (F34) | financial crises (G01) |
| short-term exposure (C41) | financial stability (G28) |
| M2/GDP (E51) | maturity of external debt (F34) |
| per capita income (D31) | maturity of external debt (F34) |
| international trade levels (F19) | short-term indebtedness (G32) |