This paper finds that limited exchange rate flexibility in the form of “fear of appreciation” significantly slows adjustment of current account imbalances, providing novel support for Friedman’s conjecture regarding exchange-rate flexibility. We present a new stylized fact: floaters have...

This paper analyzes, both theoretically and empirically, the link between capital inflows and the quality of economic institutions. To this purpose, we construct a small-open economy model of the “soft budget constraint” syndrome wherein persistently cheap funding from abroad (i) raises the...