Advanced Search
MyIDEAS: Login

Credit Constraints and Macroeconomic Instability in a Small Open Economy

Contents:

Author Info

  • Luis Felipe Céspedes
Registered author(s):

    Abstract

    This paper presents a dynamic model for a small open economy with imperfect financial market. It provides a framework to analyze the role of credit constraints and debt denomination in the generation and amplification of macroeconomic instability in an open economy context. As in Bernanke and Gertler (1989), the imperfection in the financial market results from the existence of a costly state of verification (CSV) problem. Entrepreneurs whose net worth is not enough to finance their desired physical investment have to pay a premium above the risk-free interest rate to obtain external funds. Other key ingredients of the model are that a foreign good is used as an input in the production of the capital good, and that the debt is denominated in terms of the foreign good. Real exchange rate depreciations generate an increase in the cost of producing capital and a reduction in the net worth of entrepreneurs due to the debt denomination. Therefore, recessionary effects can be deepened

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://repec.org/esLATM04/up.21071.1082067684.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 264.

    as in new window
    Length:
    Date of creation: 11 Aug 2004
    Date of revision:
    Handle: RePEc:ecm:latm04:264

    Contact details of provider:
    Phone: 1 212 998 3820
    Fax: 1 212 995 4487
    Email:
    Web page: http://www.econometricsociety.org/pastmeetings.asp
    More information through EDIRC

    Related research

    Keywords: Exchange rates; credit constraints; open economy.;

    This paper has been announced in the following NEP Reports:

    References

    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.:
    as in new window
    1. Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers 343, Banca Italia - Servizio di Studi.
    2. Roberto Chang & Andres Velasco, 1999. "Liquidity crises in emerging markets: Theory and policy," Working Paper 99-15, Federal Reserve Bank of Atlanta.
    3. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "Paper tigers?: A model of the Asian crisis," European Economic Review, Elsevier, vol. 43(7), pages 1211-1236, June.
    4. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2000. "A simple model of monetary policy and currency crises," European Economic Review, Elsevier, vol. 44(4-6), pages 728-738, May.
    5. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 1999. "Capital Markets and the Instability of Open Economies," CEPR Discussion Papers 2083, C.E.P.R. Discussion Papers.
    6. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    7. Roberto Chang & Andres Velasco, 1998. "The Asian Liquidity Crisis," NBER Working Papers 6796, National Bureau of Economic Research, Inc.
    8. Timothy S. Fuerst, 1994. "Monetary and financial interaction in the business cycle," Proceedings, Federal Reserve Bank of Cleveland, pages 1321-1353.
    9. Gertler, Mark & Rogoff, Kenneth, 1990. "North-South lending and endogenous domestic capital market inefficiencies," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 245-266, October.
    10. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
    11. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
    12. Ilan Goldfajn & Rodrigo O. Valdés, 1997. "Capital Flows and the Twin Crises : The Role of Liquidity," IMF Working Papers 97/87, International Monetary Fund.
    13. Burnside, A Craig & Eichenbaum, Martin & Rebelo, Sérgio, 1998. "Prospective Deficits and the Asian Currency Crises," CEPR Discussion Papers 2015, C.E.P.R. Discussion Papers.
    14. 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.
    15. Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, vol. 19(1-2), pages 1-24.
    16. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, vol. 6(4), pages 459-472, November.
    17. Gertler, Mark, 1995. "Monetary and Financial Interactions in the Business Cycle: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1342-53, November.
    18. Frederic S. Mishkin, 1997. "The causes and propagation of financial instability : lessons for policy makers," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 55-96.
    19. Ronald I. McKinnon & Huw Pill, 1996. "Credible Liberalizations and International Capital Flows: The “Overborrowing Syndrome”," NBER Chapters, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 7-50 National Bureau of Economic Research, Inc.
    20. Boyd, John H. & Smith, Bruce D., 1997. "Capital Market Imperfections, International Credit Markets, and Nonconvergence," Journal of Economic Theory, Elsevier, vol. 73(2), pages 335-364, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:ecm:latm04:264. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.