Comment

Abstract

Reinhart and Reinhart offer an important contribution to our understanding of the effects of large capital inflows. The algorithm they develop allows us to classify and analyze episodes of capital inflow bonanzas in a very large sample of countries, both advanced and emerging economies. The sample includes 181 countries during 1980–2007 and a subset of 66 over 1960–2007. It is the largest so far analyzed in the literature. I have two small concerns with the paper and one more interesting query. Let us start by considering the results for advanced economies. As the authors themselves say, the results for this group of countries are less stark than for developing economies. They also seem to be driven by a few odd observations concerning not the definition of “bonanzas,” but of their effects. In the data (table 6) most euro area countries appear to have experienced a currency crash (defined as an annual depreciation vs. theU.S. dollar of 15%ormore) in 2005.During 2005 the euro depreciated against the dollar 12%, but beyond the size of the depreciation—which is below the 15% threshold—it is unclear whether one should relate the depreciation of the common European currency to the three bonanza episodes that occurredwithin a period spanning the previous 3 years: France, Portugal, and Spain (table 3). The weakening of the euro in 2005 mostly mirrored the divergence in growth between the euro area and the United States: it had little to do with the three bonanza episodes. I am similarly puzzled by two episodes of banking crises: France in 1994–95 and Italy in 1990–95. Although both events fit the definition of a banking crisis given in table 5, it is unclear whether one should relate them to a previous bonanza. In France the episode corresponds to the government recapitalization of Crédit Lyonnais, a state‐owned bank that ran into troublewhen it became known that, as a result of a financial scandal, it had become the de facto owner of Metro‐Goldwyn‐Mayer, the world’s most famous movie studio. In Italy it corresponds to the state bailout of BancodiNapoli,