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Hot money

Chari, VV; Kehoe, PJ; (2003) Hot money. Journal of Political Economy , 111 (6) pp. 1262-1292. 10.1086/378525. Green open access

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Abstract

Recent empirical work on financial crises documents that crises tend to occur when macroeconomic fundamentals are weak; but even after conditioning on an exhaustive list of fundamentals, a sizable random component to crises and associated capital flows remains. We develop a model of herd behavior consistent with these observations. Informational frictions together with standard debt default problems lead to volatile capital flows resembling hot money and financial crises. We show that repaying debt during difficult times identifies a government as financially resilient, enhances its reputation, and stabilizes capital flows. Bailing out governments deprives resilient countries of the opportunity to differentiate themselves from the nonresilient.

Type: Article
Title: Hot money
Open access status: An open access version is available from UCL Discovery
DOI: 10.1086/378525
Publisher version: https://doi.org/10.1086/378525
Language: English
Additional information: This version is the version of record. For information on re-use, please refer to the publisher’s terms and conditions.
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
URI: https://discovery.ucl.ac.uk/id/eprint/10054408
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