Surges and Instability: the Maturity Shortening Channel

75 Pages Posted: 27 May 2020 Last revised: 12 Mar 2021

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: March 12, 2021

Abstract

Capital inflow surges destabilize the economy through a maturity shortening mechanism. The underlying reason is that firms tend to make their debt redeemable on demand in order to accommodate the potential liquidity needs of global investors, which makes international borrowing endogenously fragile. Based on a theoretical model and empirical evidence at both firm level and macro level, our main findings are threefold. First, corporate debt maturity shortens substantially during surges, especially for firms with foreign bank relationships. Second, surges change the shape of the interest rate term structure and lead to a more flattened yield curve. Third, the probability of a crisis following surges with a flattened yield curve is significantly larger than following surges without one. Our work suggests that debt maturity is key to understanding the consequences of capital inflow bonanzas.

Keywords: apital inflow surges; corporate maturity structure; term structure; systemic financial crisis

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

Suggested Citation

Li, Xiang and Su, Dan, Surges and Instability: the Maturity Shortening Channel (March 12, 2021). 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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