Hot Money
(772 K)
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NBER Working Paper No. 6007
Issued in April 1997
NBER Program(s): IFM
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.
Published: Chari, V.V. and Patrick J. Kehoe. "Hot Money," Journal of Political Economy, 2003, v111(6,Dec), 1262-1292.
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