Discussion Paper

Good News, Leverage, and Sudden Stops

Abstract: One of the major debates in open economy macroeconomics is the extent to which capital inflows are beneficial for growth. In principle, these flows allow countries to increase their consumption and investment spending beyond their income by enabling them to tap into foreign saving. Periods of such borrowing, however, are associated with large trade deficits, external debt accumulation, and, in some cases, overheating when these economies operate beyond their potential output level for an extended period of time. The relevant question in this context is whether the rate at which a country is taking on external debt has useful predictive information about financial crises.

Keywords: Boom-Bust Cycle; Sudden Stops; Leverage; News Shocks;

JEL Classification: F34; G01;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2018-05-30

Number: 20180530