Capital mobility and sudden stops: consequences and policy options
The first essay develops a simple three date representative agent model of a small open endowment economy without money. It allows sudden stops to occur at date two and asks whether individuals in such a shock-prone world are still better off borrowing than in autarky. Unambiguously, this chapter shows that individuals are better off borrowing than in autarky and provides a tractable core model on which the later chapters build.
The second essay then includes a long-term borrowing option as well as country-specific risk premia based on an information asymmetry between domestic borrowers and international lenders. This allows analysis of optimal maturity choices in a meaningful way. The intent is to address questions in the literature concerning whether emerging economies could enhance welfare by imposing short-term capital controls to encourage the use of longer-maturing debt and thus avoid the sudden stop. The results imply that short-term capital controls would generally lower welfare, even when sudden stops are fully anticipated.
Finally, the third essay extends the horizon of the model and includes a much wider range of maturities. This allows one to start making sense of maturity bunching (when a country's debt all matures around a given date) which is known to exacerbate sudden-stop related problems. The model shows that maturity bunching can occur endogenously when both risk premia and uncertainty over the duration of the sudden stop are present.
Advisor:Auernheimer, Leonardo; Battalio, Raymond; Tam, Henry; Love, Harold
School:Texas A&M University
School Location:USA - Texas
Source Type:Master's Thesis
Keywords:capital mobility debt maturity inflows sudden stops
Date of Publication:08/01/2003