Do Surges in International Capital Inflows Influence the Likelihood of Banking Crises?: Cross-Country Evidence on Bonanzas in Capital Inflows and Bonanza-Boom-Bust Cycles
This paper asks whether bonanzas (surges) in net capital inflows increase the probability of banking crises and whether this is necessarily through a lending boom mechanism. A fixed effects regression analysis indicates that a baseline bonanza, identified as a surge of one standard deviation from trend, increases the odds of a banking crisis by three times, even in the absence of a lending boom. Thus, a bonanza raises the likelihood of a crisis from an unconditional probability of 4.4 percent to 12 percent. Larger windfalls of capital (two-s.d. bonanzas) increase the odds of a crisis by eight times. The joint occurrence of a bonanza and a lending boom raises these odds even more. Decomposing flows into FDI, portfolio-equity and debt indicates that bonanzas in all flows increase the probability of crises when the windfall takes place jointly with a lending boom. Thus, windfalls in all types of flows exacerbate the deleterious effects of credit. However, surges in portfolio-equity flows seem to have an independent effect, even in the absence of a lending boom. Furthermore, emerging economies exhibit greater odds of crises after a windfall of capital.
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| Format: | Working Papers biblioteca |
| Language: | English |
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Inter-American Development Bank
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| Subjects: | Financial Sector, Financial Crisis and Structural Adjustement, E44 - Financial Markets and the Macroeconomy, E51 - Money Supply • Credit • Money Multipliers, F21 - International Investment • Long-Term Capital Movements, F32 - Current Account Adjustment • Short-Term Capital Movements, F34 - International Lending and Debt Problems, G01 - Financial Crises, |
| Online Access: | http://dx.doi.org/10.18235/0011385 https://publications.iadb.org/en/do-surges-international-capital-inflows-influence-likelihood-banking-crises-cross-country-evidence |
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