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Financial Markets and Financial Leverage in a Two-Country World-Economy

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Simon Gilchrist

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Abstract

In this paper, we consider the role of financial market imperfections in a simplified version of a twocountry model. We model cross-country financial heterogeneity through differences in leverage. We show that high leverage economies are particularly vulnerable to slow-downs in the world economy. The degree to which leverage magnifies shocks to the world economy depends on the nature of the disturbance. In the presence of the financial accelerator, supply shocks that are capital specific are likely to be less destabilizing than supply shocks that are disembodied.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 228.

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Date of creation: Oct 2003
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Handle: RePEc:chb:bcchwp:228

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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. Laurence Booth, 2001. "Capital Structures in Developing Countries," Journal of Finance, American Finance Association, vol. 56(1), pages 87-130, 02. [Downloadable!] (restricted)
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  2. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  4. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 1999. "Institutions, financial markets, and firm debt maturity," Journal of Financial Economics, Elsevier, vol. 54(3), pages 295-336, December. [Downloadable!] (restricted)
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  1. Javier Gómez Pineda, 2004. "A Framework for Macroeconomic Stability in Emerging Market Economies," BORRADORES DE ECONOMIA 001915, BANCO DE LA REPÚBLICA. [Downloadable!]
  2. Ian Christensen & Ali Dib, 2008. "The Financial Accelerator in an Estimated New Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 155-178, January. [Downloadable!] (restricted)
  3. Javier Gómez Pineda, . "A Framework for Macroeconomic Stability in Emerging Market Economies," Borradores de Economia 320, Banco de la Republica de Colombia. [Downloadable!]
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