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Capital Flow Surges As Bubbles: Behavioral Finance And Mckinnon’S Over-Borrowing Syndrome Extended

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  • 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)

  • JOHN RUTLEDGE

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

  • THOMAS D. WILLETT

    (Claremont Institute for Economic Policy Studies, Claremont Graduate University, Claremont, CA 91711, USA§Claremont McKenna College, Claremont, CA 91711, USA)

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.

Suggested Citation

  • Levan Efremidze & John Rutledge & Thomas D. Willett, 2016. "Capital Flow Surges As Bubbles: Behavioral Finance And Mckinnon’S Over-Borrowing Syndrome Extended," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(02), pages 1-27, June.
    • Handle: RePEc:wsi:serxxx:v:61:y:2016:i:02:n:s0217590816400233
    DOI: 10.1142/S0217590816400233
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