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Contagion and volatility with imperfect credit markets

Author: Pierre-Richard Agénor; Joshua Aizenman; National Bureau of Economic Research.
Publisher: Cambridge, MA : National Bureau of Economic Research, ©1997.
Series: Working paper series (National Bureau of Economic Research), working paper no. 6080.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
Abstract: This paper interprets contagion effects as a perceived increase (triggered by events occurring elsewhere) in the volatility of aggregate shocks impinging on the domestic economy. The implications of this approach are analyzed in a model with two types of credit market imperfections: domestic banks borrow at a premium on world capital markets, and domestic producers (whose demand for credit results from  Read more...
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Additional Physical Format: Print version:
Agénor, Pierre-Richard.
Contagion and volatility with imperfect credit markets.
Cambridge, MA : National Bureau of Economic Research, ©1997
(OCoLC)37378328
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Pierre-Richard Agénor; Joshua Aizenman; National Bureau of Economic Research.
OCLC Number: 647062734
Reproduction Notes: Electronic reproduction. [S.l.] : HathiTrust Digital Library, 2010. MiAaHDL
Description: 1 online resource (23, [7] pages) : illustrations.
Details: Master and use copy. Digital master created according to Benchmark for Faithful Digital Reproductions of Monographs and Serials, Version 1. Digital Library Federation, December 2002.
Series Title: Working paper series (National Bureau of Economic Research), working paper no. 6080.
Responsibility: Pierre-Richard Agénor, Joshua Aizenman.

Abstract:

Abstract: This paper interprets contagion effects as a perceived increase (triggered by events occurring elsewhere) in the volatility of aggregate shocks impinging on the domestic economy. The implications of this approach are analyzed in a model with two types of credit market imperfections: domestic banks borrow at a premium on world capital markets, and domestic producers (whose demand for credit results from working capital needs) borrow at a premium from domestic banks which possess comparative advantage in monitoring the behavior of domestic agents. Financial intermediation spreads are shown to be determined by a markup that compensates for the expected cost of contract enforcement and state verification and for the expected revenue lost in adverse states of nature. Higher volatility of producers' productivity shocks increases both financial spreads and the producers' cost of capital, resulting in lower employment and higher incidence of default. The welfare effects of volatility are non-linear. Higher volatility does not impose any welfare cost for countries characterized by relatively low volatility and efficient financial intermediation. The adverse welfare effects are large (small) for countries that are at the threshold of full integration with international capital markets (close to financial autarky), that is, countries characterized by a relatively low (high) probability of default.

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