Negative Alchemy? Corruption, Composition of Capital Flows, and Currency Crises / Shang-Jin Wei, Yi Wu.

Format:

Book

Author/Creator:

Wei, Shang-Jin.

Contributor:

National Bureau of Economic Research.

Wu, Yi.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8187.

NBER working paper series no. w8187

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2001.

Summary:

Crony capitalism and self-fulfilling expectations by international creditors are often suggested as two rival explanations for currency crisis. This paper examines a possible linkage between the two that has not been explored much in the literature: corruption may affect a country's composition of capital inflows in a way that makes it more likely to experience a currency crisis that is triggered/aided by a sudden reversal of international capital flows. We find robust evidence that poor public governance is associated with a higher loan-to-FDI ratio. Such a composition of capital flows has been identified as being associated with a higher incidence of a currency crisis. We also find some weaker evidence that poor public governance is associated with a country's inability to borrow internationally in its own currency. The latter is also associated with a higher incidence of a currency crisis. To sum up, even though crony capitalism does not forecast the timing of a crisis, it can nevertheless increase its likelihood. This paper illustrates a particular channel through which this can happen.

Notes:

Print version record

March 2001.