Financial market liberalizations are an integral part of economic development. While initial booms in investment and output are commonly seen as signs of successful deregulation, they often reverse at a later stage as international capital flows turn negative and economic growth slows markedly....

By specifying borrowing costs to increase with the debt to equity ratio we generate procyclical debt flows in response to terms of trade shocks, consistent with empirical evidence. Since procyclical capital flows attract unsustainably large capital inflows during favorable shocks and force...