NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Hot Money

V. V. Chari, Patrick Kehoe

NBER Working Paper No. 6007
Issued in April 1997
NBER Program(s):International Finance and Macroeconomics

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.

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Document Object Identifier (DOI): 10.3386/w6007

Published: Chari, V.V. and Patrick J. Kehoe. "Hot Money," Journal of Political Economy, 2003, v111(6,Dec), 1262-1292. citation courtesy of

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