Surges and Instability: The Maturity Shortening Channel

70 Pages Posted: 27 May 2020 Last revised: 18 Aug 2022

See all articles by Xiang Li

Xiang Li

Halle Institute for Economic Research

Dan Su

Cheung Kong Graduate School of Business

Date Written: April 7, 2022

Abstract

Capital inflow surges destabilize the economy through a maturity shortening mechanism. The underlying reason is that firms have incentives to redeem their debt on demand to accommodate the potential liquidity needs of global investors, which makes international borrowing endogenously fragile. Based on a theoretical model and empirical evidence at both the firm and macro levels, our main findings are twofold. First, a significant association exists between surges and shortened corporate debt maturity, especially for firms with foreign bank relationships and higher redeployability. Second, the probability of a crisis following surges with a flattened yield curve is significantly higher than that following surges without one. Our study suggests that debt maturity is the key to understand the financial instability consequences of capital inflow bonanzas.

Keywords: apital inflow surges; corporate maturity structure; term structure; systemic financial crisis

JEL Classification: F32; F34; F38; F65; G32

Suggested Citation

Li, Xiang and Su, Dan, Surges and Instability: The Maturity Shortening Channel (April 7, 2022). Journal of International Economics, Available at SSRN: https://ssrn.com/abstract=3588490 or http://dx.doi.org/10.2139/ssrn.3588490

Xiang Li (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Dan Su

Cheung Kong Graduate School of Business ( email )

1 East Chang'an Street
Beijing, 100738
China

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