Arbeitspapier

International Credit Flows and Pecuniary Externalities

This paper develops a dynamic two-country neoclassical stochastic growth model with incomplete markets. Short-term credit flows can be excessive and reverse suddenly. The equilibrium outcome is constrained inefficient due to pecuniary externalities. First, an undercapitalized country borrows too much since each firm does not internalize that an increase in production capacity undermines their output price, worsening their terms of trade. From an ex-ante perspective each firm undermines the natural “terms of trade hedge.” Second, sudden stops and fire sales lead to sharp price drops of illiquid capital. Capital controls or domestic macro-prudential measures that limit short-term borrowing can improve welfare.

Sprache
Englisch

Erschienen in
Series: CESifo Working Paper ; No. 5170

Klassifikation
Wirtschaft
International Monetary Arrangements and Institutions
International Lending and Debt Problems
Financial Aspects of Economic Integration
International Financial Policy: Financial Transactions Tax; Capital Controls
Open Economy Macroeconomics
International Financial Markets
Thema
credit flows
capital flows
sudden stops
pecuniary externalities
hot money
Phoenix Miracle
terms of trade hedge

Ereignis
Geistige Schöpfung
(wer)
Brunnermeier, Markus
Sannikov, Yuliy
Ereignis
Veröffentlichung
(wer)
Center for Economic Studies and ifo Institute (CESifo)
(wo)
Munich
(wann)
2015

Handle
Letzte Aktualisierung
20.09.2024, 08:22 MESZ

Datenpartner

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Objekttyp

  • Arbeitspapier

Beteiligte

  • Brunnermeier, Markus
  • Sannikov, Yuliy
  • Center for Economic Studies and ifo Institute (CESifo)

Entstanden

  • 2015

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