This paper has benefited greatly from comments by Sara Calvo, the guest editors, Pablo Ottonello, and three anonymous referees.
Sudden Stop and Sudden Flood of Foreign Direct Investment: Inverse Bank Run, Output, and Welfare Distribution
Article first published online: 30 DEC 2013
© The editors of The Scandinavian Journal of Economics 2013.
The Scandinavian Journal of Economics
Volume 116, Issue 1, pages 5–19, January 2014
How to Cite
Calvo, G. A. (2014), Sudden Stop and Sudden Flood of Foreign Direct Investment: Inverse Bank Run, Output, and Welfare Distribution. The Scandinavian Journal of Economics, 116: 5–19. doi: 10.1111/sjoe.12041
- Issue published online: 30 DEC 2013
- Article first published online: 30 DEC 2013
- Capital flows;
- financial crisis;
- speculative bubbles;
In this paper, I focus on a phenomenon that has not received much attention in the literature, namely that the mere expectation of foreign direct investment (FDI) incentivizes long-maturity investment projects by domestic residents, and a Sudden Stop when expectations are frustrated. Long-maturity investment projects enhance productivity but increase the economy's vulnerability to Sudden Stop. The discussion is framed in a context in which a Sudden Stop follows a surge of capital inflows (Sudden Flood), and FDI is concentrated on ongoing projects. A Sudden Stop episode can trigger a fire sale of long-term assets, output collapse, and welfare redistribution, which is another ignored phenomenon.