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Foreign Lenders in Emerging Economies

Author

Listed:
  • Raoul Minetti

    (Michigan State University)

  • Matteo Iacoviello

    (Boston College)

Abstract

In recent decades, after liberalizing their credit markets emerging economies have frequently experienced sustained output growth but also large volatility of output and asset (e.g., real estate) prices. This paper studies an economy where firms face credit constraints tied to the pledgeable returns - output and collateralizable assets - of their investments and domestic and foreign lenders have different comparative advantages in obtaining investment returns. Building on evidence from emerging economies, we postulate that foreign lenders are more efficient than domestic ones in monitoring the output of specialized assets but have less information in the local market where assets are traded. The analysis reveals that opening the economy to foreign lenders can raise average productivity and output but also the volatility of output and of the price of collateral assets over the business cycle. These effects appear more pronounced the lower is the degree of contract enforceability in the economy.

Suggested Citation

  • Raoul Minetti & Matteo Iacoviello, 2010. "Foreign Lenders in Emerging Economies," 2010 Meeting Papers 1050, Society for Economic Dynamics.
  • Handle: RePEc:red:sed010:1050
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    References listed on IDEAS

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    Cited by:

    1. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
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    3. Sebnem Kalemli-Ozcan, 2011. "Comment on "The Risk Content of Exports: A Portfolio View of International Trade"," NBER Chapters, in: NBER International Seminar on Macroeconomics 2011, pages 152-157, National Bureau of Economic Research, Inc.
    4. Aadil Nakhoda, 2014. "The Influence of Industry Financial Composition on the Exports from Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 10, pages 21-49.

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