Surges and Instability: the Maturity Shortening Channel

Abstract

Capital inflow surges destabilize the economy through a maturity shortening mechanism. Our main findings are threefold. First, surges are not just scaled-up normal flows, as they change the shape of the interest rate term structure. Second, corporate debt maturity shortens substantially during surges, especially for firms with foreign bank relationships. Third, the probability of a crisis following surges with a widened term spread is at least twice that after surges without one. Our work suggests that financial globalization is not merely an equalization of interest rate differentials, and debt maturity is key to understanding the consequences of capital inflow bonanzas.

Keywords: capital inflow surges; corporate maturity structure; systematic financial crisis

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