Short-Term Capital Flows

Dani Rodrik, Andres Velasco

NBER Working Paper No. 7364
Issued in September 1999
NBER Program(s):   IFM

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.

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Document Object Identifier (DOI): 10.3386/w7364

Published: Pleskovic, Boris and Joseph E. Stiglitz. Annual World Bank Conference on Development Economics. Washington, D.C.: World Bank, 2000.

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