Negative Alchemy? Corruption, Compositions of Capital Flows, and Currency Crises

No 66A, CID Working Papers from Center for International Development at Harvard University

Abstract: 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 international investors’ self-fulfilling expectations. We find robust evidence that poor public governance is associated with a higher loan-to-FDI ratio. Such composition of capital flows has been identified in the literature as being associated with a higher incidence of a currency crisis. There is also 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. Therefore, the paper illustrates a particular channel through which crony capitalism can increase the chance of a currency/financial crisis even though it may not forecast the timing of the latter.

Keywords: corruption; crony capitalism; capital inflows; currency crisis (search for similar items in EconPapers)
JEL-codes: F2 (search for similar items in EconPapers)
Date: 2001-03
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Citations: View citations in EconPapers (7)

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Related works:
Chapter: Negative Alchemy? Corruption, Composition of Capital Flows, and Currency Crises (2002)
Working Paper: Negative Alchemy? Corruption, Composition of Capital Flows, and Currency Crises (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:cid:wpfacu:66a

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