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Financial globalization, financial crises and contagion

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  • Mendoza, Enrique G.
  • Quadrini, Vincenzo

Abstract

Two observations suggest that financial globalization played an important role in the recent financial crisis. First, more than half of the rise in net borrowing of the U.S. non-financial sectors since the mid-1980s has been financed by foreign lending. Second, the collapse of the U.S. housing and mortgage-backed-securities markets had worldwide effects on financial institutions and asset markets. Using an open-economy model where financial intermediaries play a central role, we show that financial integration leads to a sharp rise in net credit in the most financially developed country and to large asset price spillovers of country-specific shocks to bank capital. The impacts of these shocks on asset prices are amplified by bank capital requirements based on mark-to-market.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 57 (2010)
Issue (Month): 1 (January)
Pages: 24-39

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Handle: RePEc:eee:moneco:v:57:y:2010:i:1:p:24-39

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Web page: http://www.elsevier.com/locate/inca/505566

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Keywords: Financial globalization Financial crises Contagion Financial development U.S. crisis;

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  1. Enrique G. Mendoza, 2008. "Sudden stops, financial crises and leverage: a Fisherian deflation of Tobin's Q," International Finance Discussion Papers 960, Board of Governors of the Federal Reserve System (U.S.).
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  9. Enrique G. Mendoza & Vincenzo Quadrini & Jose-Victor Rios-Rull, 2007. "Financial Integration, Financial Deepness and Global Imbalances," NBER Working Papers 12909, National Bureau of Economic Research, Inc.
  10. Alvaro Aguiar & Ines Drumond, 2007. "Business Cycle and Bank Capital: Monetary Policy Transmission under the Basel Accords," FEP Working Papers 242, Universidade do Porto, Faculdade de Economia do Porto.
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  14. Enrique G. Mendoza & Vincenzo Quadrini & José-Víctor Ríos-Rull, 2009. "On the Welfare Implications of Financial Globalization without Financial Development," NBER Chapters, in: NBER International Seminar on Macroeconomics 2007, pages 283-312 National Bureau of Economic Research, Inc.
  15. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
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  17. Enrique G. Mendoza & Vincenzo Quadrini & José-Víctor Ríos-Rull, 2009. "Financial Integration, Financial Development, and Global Imbalances," Journal of Political Economy, University of Chicago Press, vol. 117(3), pages 371-416, 06.
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  19. Meh, Césaire A. & Moran, Kevin, 2010. "The role of bank capital in the propagation of shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 555-576, March.
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