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| Capital inflow surges destabilise 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 globalisation is not merely an equalisation of interest rate differentials and debt maturity is key to understanding the consequences of capital inflow bonanzas. |
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