Special Issue in Memory and Honor of Prof. Ronald McKinnon; Guest Editor: Tan Kong Yam, Nanyang Technological UniversityNo Access

CAPITAL FLOW SURGES AS BUBBLES: BEHAVIORAL FINANCE AND MCKINNON’S OVER-BORROWING SYNDROME EXTENDED

LEVAN EFREMIDZE

Claremont Institute for Economic Policy Studies, Claremont Graduate University, Claremont, CA 91711, USA

Graziadio School of Business and Management, Pepperdine University, Malibu, CA 90263, USA

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JOHN RUTLEDGE

Claremont Institute for Economic Policy Studies, Claremont Graduate University, Claremont, CA 91711, USA

Chief Investment Officer, Safanad, Inc.

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, and

THOMAS D. WILLETT

Claremont Institute for Economic Policy Studies, Claremont Graduate University, Claremont, CA 91711, USA

Claremont McKenna College, Claremont, CA 91711, USA

E-mail Address: tom.willet@cgu.edu

Corresponding author.

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https://doi.org/10.1142/S0217590816400233Cited by:6 (Source: Crossref)

Abstract

This paper explores how behavioral finance and complexity economics, along with imperfect information, faulty mental models and perverse incentive structures can cast light on the factors that generate the international capital flow surges and sudden stops that McKinnon described as the over-borrowing syndrome. While there has been a great deal of empirical research on this topic in recent years, there has been much less theoretical analysis of why these flows too often behave in such a volatile manner. Developing a better understanding of the forces driving capital flows should help us identify situations where capital flow surges are particularly likely to end in costly sudden stops and help policy makers decide how best to respond to such flows.

Earlier versions of major parts of this paper were presented at the joint George Mason University Center for Emerging Market Policies — Claremont Institute for Economic Policy Studies Workshop on International Financial Research, April 20, 2012 and the Annual Meetings for the Western Economics Association International, June 2014. It is part of larger Claremont project on applications of behavioral finance to global financial issues.

Keywords:

JEL: F3, F4, G01, G02, G15

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