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International credit flows and pecuniary externalities

Author: Markus Konrad Brunnermeier; Yuliy Sannikov; National Bureau of Economic Research,
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2014.
Series: Working paper series (National Bureau of Economic Research), no. 20803.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
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  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Markus Konrad Brunnermeier; Yuliy Sannikov; National Bureau of Economic Research,
OCLC Number: 901499303
Notes: "December 2014"
Description: 1 online resource (50 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 20803.
Responsibility: Markus K. Brunnermeier, Yuliy Sannikov.

Abstract:

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.

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