Sudden Stop and Sudden Flood of Foreign Direct Investment: Inverse Bank Run,Output, and Welfare Distribution |
| |
Authors: | Guillermo A Calvo |
| |
Institution: | Columbia University, , New York, NY, 10027This paper has benefited greatly from comments by Sara Calvo, the guest editors, Pablo Ottonello, and three anonymous referees. |
| |
Abstract: | In this paper, I focus on a phenomenon that has not received much attention in the literature, namely that the mere expectation of foreign direct investment (FDI) incentivizes long‐maturity investment projects by domestic residents, and a Sudden Stop when expectations are frustrated. Long‐maturity investment projects enhance productivity but increase the economy's vulnerability to Sudden Stop. The discussion is framed in a context in which a Sudden Stop follows a surge of capital inflows (Sudden Flood), and FDI is concentrated on ongoing projects. A Sudden Stop episode can trigger a fire sale of long‐term assets, output collapse, and welfare redistribution, which is another ignored phenomenon. |
| |
Keywords: | Capital flows financial crisis speculative bubbles F32 F34 |
|
|