Journal Article

Financial Fragility in Small Open Economies: Firm Balance Sheets and the Sectoral Structure

Yannick Kalantzis

in The Review of Economic Studies

Volume 82, issue 3, pages 1194-1222
Published in print July 2015 | ISSN: 0034-6527
Published online March 2015 | e-ISSN: 1467-937X | DOI: https://dx.doi.org/10.1093/restud/rdv011
Financial Fragility in Small Open Economies: Firm Balance Sheets and the Sectoral Structure

More Like This

Show all results sharing these subjects:

  • Macroeconomic Aspects of International Trade and Finance
  • Economic Growth and Aggregate Productivity
  • International Finance
  • Money and Interest Rates

GO

Show Summary Details

Preview

Episodes of large capital inflows in small open economies are often associated with a shift of resources from the tradable to the non-tradable sector and sometimes lead to balance-of-payments crises. This article builds a two-sector dynamic model to study the evolution of the sectoral structure and its impact on financial fragility. The model embeds a static mechanism of balance-of-payments crisis which produces multiple equilibria within a single time period when the non-tradable sector is large enough compared to the tradable sector. The article studies the dynamics induced by an increase in financial openness. It shows that the relative size of the non-tradable sector overshoots, which makes the economy more likely to be financially fragile during the transitory dynamics. Using an extended version of the model, the article conducts a quantitative analysis and shows that this mechanism accounts well for several episodes of large capital inflows that led to financial crises.

Keywords: Two-sector models; capital account liberalization; balance-of-payments crises; foreign currency debt; borrowing constraint; euro area crisis; E44; F32; F34; F43; O41

Journal Article.  13631 words.  Illustrated.

Subjects: Macroeconomic Aspects of International Trade and Finance ; Economic Growth and Aggregate Productivity ; International Finance ; Money and Interest Rates

Full text: subscription required

How to subscribe Recommend to my Librarian

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content. subscribe or login to access all content.