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Contagion and Volatility with Imperfect Credit Markets

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Author Info
Pierre-Richard Agenor (International Monetary Fund)
Joshua Aizenman (International Monetary Fund)

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Abstract

This paper interprets contagion effects as an increase in the volatility of shocks impinging on the economy. The implications of this approach are analyzed in a model in which domestic banks borrow at a premium on world capital markets, and domestic producers borrow at a premuim from domestic banks. Financial spreads depend on a markup that compensates lenders, in particular, for the expected cost of contract enforcement. Higher volatility increases financial spreads and the producers' cost of capital, resulting in lower employment and higher incidence of default. Welfare effects are nonlinearly related to the degree of international financial integration. Copyright 1998, International Monetary Fund

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Publisher Info
Article provided by Palgrave Macmillan Journals in its journal IMF Staff Papers.

Volume (Year): 45 (1998)
Issue (Month): 2 ()
Pages: 1
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Handle: RePEc:pal:imfstp:v:45:y:1998:i:2:p:1

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Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
I31 - Health, Education, and Welfare - - Welfare and Poverty - - - General Welfare

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  2. Ilan Goldfajn & Rodrigo Valdés, 1997. "Balance of Payments Crises and Capital Flows: The Role of Liquidity," Working Papers Central Bank of Chile 11, Central Bank of Chile. [Downloadable!]
  3. Luis Catão, 1997. "Bank Credit in Argentina in the Aftermath of the Mexican Crisis: Supply or Demand Constrained?," IMF Working Papers 97/32, International Monetary Fund.
  4. Joshua Aizenman & Michael Gavin & Ricardo Hausmann, 1996. "Optimal Tax and Debt Policy with Endogenously Imperfect Creditworthiness," NBER Working Papers 5558, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Jaffee, Dwight & Stiglitz, Joseph, 1990. "Credit rationing," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 16, pages 837-888 Elsevier. [Downloadable!] (restricted)
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This page was last updated on 2009-11-30.

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