Surges and Instability: the Maturity Shortening Channel

72 Pages Posted: 27 May 2020 Last revised: 20 Nov 2020

See all articles by Xiang Li

Xiang Li

Halle Institute for Economic Research

Dan Su

University of Minnesota - Twin Cities - Carlson School of Management

Date Written: November 19, 2020

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

Suggested Citation

Li, Xiang and Su, Dan, Surges and Instability: the Maturity Shortening Channel (November 19, 2020). 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

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

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