Investor risk aversion and financial fragility in emerging economies

Nilsen, Jeffrey H. ; Rovelli, Riccardo (2000) Investor risk aversion and financial fragility in emerging economies. DOI 10.6092/unibo/amsacta/694.
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Abstract

Bank intermediated short-term capital inflows play a crucial role in the financial structure of many emerging economies. Yet since these funds are subject to the risk of early withdrawal, an excessive reliance on this financing is often associated with a financial or currency crisis. We model a situation where withdrawals are motivated by a change in either the domestic or foreign fundamentals. We show that, for a given change in fundamentals, a sudden reversal in the capital flows, and hence a financial crisis, is more likely the more risk averse are the foreign investors. We also show that a policy to tax early withdrawals may discourage the inflows more likely to cause fundamental runs, as it prevents the relatively more risk averse investors from investing. However, the policy must be fine-tuned to avoid discouraging all capital inflows.

Abstract
Document type
Monograph (Working Paper)
Creators
CreatorsAffiliationORCID
Nilsen, Jeffrey H.
Rovelli, Riccardo
Keywords
Short-term capital inflows Financial fragility Chilean tax
Subjects
DOI
Deposit date
17 Jun 2004
Last modified
17 Feb 2016 14:01
URI

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