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International Contagion Through Leveraged Financial Institutions

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  • Eric van Wincoop

Abstract

The 2008-2009 financial crises, while originating in the United States, witnessed a drop in asset prices and output that was at least as large in the rest of the world as in the United States. A widely held view is that this was the result of global transmission through leveraged financial institutions. We investigate this in the context of a simple two-country model. The paper highlights what the various transmission mechanisms associated with balance sheet losses are, how they operate, what their magnitudes are and what the role is of different types of borrowing constraints faced by leveraged institutions. For realistic parameters we find that the model cannot account for the global nature of the crisis, both in terms of the size of the impact and the extent of transmission.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17686.

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Date of creation: Dec 2011
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Publication status: published as International Contagion Through Leveraged Financial Institutions, AEJ Macroeconomics 5(3), 152-189, 2013
Handle: RePEc:nbr:nberwo:17686

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References

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  1. Robert KOLLMANN, 2011. "Global Banking and International Business Cycles," 2011 Meeting Papers 20, Society for Economic Dynamics.
  2. Helbling, Thomas & Huidrom, Raju & Kose, M. Ayhan & Otrok, Christopher, 2011. "Do credit shocks matter? A global perspective," European Economic Review, Elsevier, vol. 55(3), pages 340-353, April.
  3. Kozo Ueda, 2010. "Banking Globalization and International Business Cycles," IMES Discussion Paper Series 10-E-16, Institute for Monetary and Economic Studies, Bank of Japan.
  4. Daniel O. Beltran & Laurie Pounder & Charles Thomas, 2008. "Foreign exposure to asset-backed securities of U.S. origin," International Finance Discussion Papers 939, Board of Governors of the Federal Reserve System (U.S.).
  5. Claudia M. Buch & John C. Driscoll & Charlotte Ostergaard, 2010. "Cross-Border Diversification in Bank Asset Portfolios," International Finance, Wiley Blackwell, vol. 13(1), pages 79-108, 03.
  6. Tobias Adrian & Hyun Song Shin, 2008. "Financial intermediary leverage and value at risk," Staff Reports 338, Federal Reserve Bank of New York.
  7. Okawa, Yohei & van Wincoop, Eric, 2012. "Gravity in International Finance," Journal of International Economics, Elsevier, vol. 87(2), pages 205-215.
  8. Giovanni Lombardo & Luca Dedola, 2010. "Financial Frictions, Financial Integration and the International Propagation of Shocks," 2010 Meeting Papers 288, Society for Economic Dynamics.
  9. Fidora, Michael & Fratzscher, Marcel & Thimann, Christian, 2007. "Home bias in global bond and equity markets: The role of real exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 631-655, June.
  10. Alicia García-Herrero & Francisco F. Vázquez, 2007. "International Diversification Gains and Home Bias in Banking," IMF Working Papers 07/281, International Monetary Fund.
  11. François Gourio & Michael Siemer & Adrien Verdelhan, 2011. "International Risk Cycles," NBER Working Papers 17277, National Bureau of Economic Research, Inc.
  12. Michael B Devereux & James Yetman, 2010. "Financial deleveraging and the international transmission of shocks," BIS Papers chapters, in: Bank for International Settlements (ed.), The international financial crisis and policy challenges in Asia and the Pacific, volume 52, pages 274-298 Bank for International Settlements.
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Cited by:
  1. Bremus, Franziska & Buch, Claudia M. & Russ, Katheryn N. & Schnitzer, Monika, 2013. "Big Banks and Macroeconomic Outcomes: Theory and Cross-Country Evidence of Granularity," Munich Reprints in Economics 20226, University of Munich, Department of Economics.
  2. Kristin J. Forbes, 2012. "The “Big C”: identifying and mitigating contagion," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 23-87.
  3. Eickmeier, Sandra & Ng, Tim, 2011. "How Do Credit Supply Shocks Propagate Internationally? A GVAR approach," CEPR Discussion Papers 8720, C.E.P.R. Discussion Papers.
  4. Kristin Forbes, 2012. "The "Big C": Identifying Contagion," NBER Working Papers 18465, National Bureau of Economic Research, Inc.
  5. Milcheva, Stanimira, 2013. "Cross-country effects of regulatory capital arbitrage," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5329-5345.

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