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Credit Market Imperfections in Middle Income Countries

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  • Aaron Tornell
  • Frank Westermann

Abstract

In this paper we document three credit market imperfections prevalent in middle income countries that can help to explain boom-bust cycles, as well as other macroeconomic patterns observed at higher frequencies across these countries. These imperfections are: the existence of financing constraints that affect mainly the nontradables sector, currency mismatch and guarantees that cover lenders against systemic crises. In MICs T-sector firms have access to international capital markets, while most N-firms are bank-dependent and are financially constrained. Systemic guarantees generate incentives for borrowers to take on insolvency risk by denominating debt in foreign currency. This currency mismatch makes movements in the real exchange rate – the relative price between N and T goods – the driving element in the amplification of shocks.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 960.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_960

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  1. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2000. "Capital Markets and the Instability of Open Economies," Working Papers 99.01 update, Swiss National Bank, Study Center Gerzensee.
  2. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2001. "Prospective Deficits and the Asian Currency Crisis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(6), pages 1155-1197, December.
  3. Michael D. Bordo & Anna J. Schwartz, 2000. "Measuring Real Economic Effects of Bailouts: Historical Perspectives on How Countries in Financial Distress Have Fared With and Without Bailouts," NBER Working Papers 7701, National Bureau of Economic Research, Inc.
  4. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "Paper tigers?: A model of the Asian crisis," European Economic Review, Elsevier, Elsevier, vol. 43(7), pages 1211-1236, June.
  5. Martin Schneider & Aaron Tornell, 2000. "Balance SHeet Effects, Bailout Guarantees and Financial Crises," NBER Working Papers 8060, National Bureau of Economic Research, Inc.
  6. Aaron Tornell & Frank Westermann, 2003. "The Credit Channel in Middle Income Countries," CESifo Working Paper Series 832, CESifo Group Munich.
  7. Schiffer, M. & Weder, B., 2001. "Firm Size and the Business Environment: Worldwide Survey Results," Papers, World Bank - International Finance Corporation 43, World Bank - International Finance Corporation.
  8. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, Elsevier, vol. 48(3), pages 513-548, December.
  9. Aaron Tornell & Frank Westermann, 2002. "Boom-Bust Cycles in Middle Income Countries: Facts and Explanation," IMF Staff Papers, Palgrave Macmillan, vol. 49(Special i), pages 111-155.
  10. McKinnon, Ronald I & Pill, Huw, 1997. "Credible Economic Liberalizations and Overborrowing," American Economic Review, American Economic Association, American Economic Association, vol. 87(2), pages 189-93, May.
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