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Contagion, bank lending spreads, and output fluctuations

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  • Agenor, Pierre-Richard
  • Aizenman, Joshua
  • Hoffmaister, Alexander

Abstract

The authors study how contagion affects bank lending spreads and fluctuations in output in Argentina. They analyze what determines bank lending spreads when verification and enforcement costs for loan contracts are high. They present estimates of a vector auto-regression model that relates bank lending spreads, the cyclical component of output, the real bank lending rate, and the spread in external interest rates. Using generalized impulse response functions, they show that a positive historical shock to external spreads leads to an increase in domestic spreads and a reduction in the cyclical component of output. Historical decompositions indicate that shocks to external spreads immediately after the Mexican peso crisis had a sizable effect on movements in output and domestic interest rate spreads in Argentina.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2186.

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Date of creation: 30 Sep 1999
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Handle: RePEc:wbk:wbrwps:2186

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  1. Sebastian Edwards & Carlos A. Vegh, 1997. "Banks and Macroeconomics Disturbances under Predetermined Exchange Rates," NBER Working Papers 5977, National Bureau of Economic Research, Inc.
  2. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Technical Working Papers 0100, National Bureau of Economic Research, Inc.
  3. Joshua Aizenman & Pierre-Richard Agénor, 1997. "Contagion and Volatility with Imperfect Credit Markets," IMF Working Papers 97/127, International Monetary Fund.
  4. Peter Isard & Liliana Rojas-Suárez & Donald J. Mathieson, 1992. "A Framework for the Analysis of Financial Reforms and the Cost of official Safety Nets," IMF Working Papers 92/31, International Monetary Fund.
  5. Greenwald, Bruce C & Stiglitz, Joseph E, 1993. "Financial Market Imperfections and Business Cycles," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(1), pages 77-114, February.
  6. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, Elsevier, vol. 21(2), pages 265-293, October.
  7. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 14-31, March.
  8. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, Elsevier, vol. 74(1), pages 119-147, September.
  9. Ho, Thomas S. Y. & Saunders, Anthony, 1981. "The Determinants of Bank Interest Margins: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 16(04), pages 581-600, November.
  10. Pesaran, M. H. & Shin, Y., 1997. "Generalised Impulse Response Analysis in Linear Multivariate Models," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 9710, Faculty of Economics, University of Cambridge.
  11. Pierre-Richard Agénor, 1997. "Borrowing Risk and the Tequila Effect," IMF Working Papers 97/86, International Monetary Fund.
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Cited by:
  1. Victor Pontines & Reza Siregar, 2009. "Tranquil and crisis windows, heteroscedasticity, and contagion measurement: MS-VAR application of the DCC procedure," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 19(9), pages 745-752.
  2. Agénor, Pierre-Richard & Aizenman, Joshua, 2011. "Capital market imperfections and the theory of optimum currency areas," Journal of International Money and Finance, Elsevier, Elsevier, vol. 30(8), pages 1659-1675.
  3. Caprio, Gerard & Honohan, Patrick, 2001. "Finance for Growth: Policy Choices in a Volatile World," MPRA Paper 9929, University Library of Munich, Germany.
  4. Pierre-Richard Agénor & Peter J. Montiel, 2007. "Monetary Policy Analysis in a Small Open Credit-Based Economy," Centre for Growth and Business Cycle Research Discussion Paper Series, Economics, The Univeristy of Manchester 90, Economics, The Univeristy of Manchester.
  5. Agenor, Pierre-Richard & Aizenman, Joshua, 2002. "Financial sector inefficiencies and the debt Laffer curve," Policy Research Working Paper Series 2842, The World Bank.
  6. Aaron Tornell & Frank Westermann, 2003. "The Credit Channel in Middle Income Countries," CESifo Working Paper Series 832, CESifo Group Munich.
  7. Ann Cavlovic & Kathleen Day, . "Equalization and the Incentives for Growth: An Empirical Investigation of the "Tax-Back" Effect," Working Papers-Department of Finance Canada, Department of Finance Canada 2003-23, Department of Finance Canada.
  8. Aaron Tornell, 2002. "The Credit Channel in Middle Income Countries (October 2002), with Frank Westermann," UCLA Economics Online Papers, UCLA Department of Economics 216, UCLA Department of Economics.
  9. Stijn Claessens & Thomas Glaessner & Daniela Klingebiel, 2002. "Electronic Finance: Reshaping the Financial Landscape Around the World," Journal of Financial Services Research, Springer, Springer, vol. 22(1), pages 29-61, August.
  10. Pierre-Richard Agenor & Joshua Aizenman, 1999. "Financial Sector Inefficiencies and Coordinate Failures: Implications for Crisis Management," NBER Working Papers 7446, National Bureau of Economic Research, Inc.
  11. Yong Sarah Zhou, 2008. "Capital Flows and Economic Fluctuations," IMF Working Papers 08/12, International Monetary Fund.
  12. Herrera, Santiago & Perry, Guillermo & Quintero, Neile, 2000. "Output fluctuations in Latin America - what explains the recent slowdown?," Policy Research Working Paper Series 2333, The World Bank.
  13. Santiago Herrera & Guillermo Perry & Neile Quintero, 2000. "Output Fluctuations in Latin America: What Explains the Recent Slowdown?," Macroeconomics, EconWPA 0004012, EconWPA.
  14. Khalid, Ahmed M. & Kawai, Masahiro, 2003. "Was financial market contagion the source of economic crisis in Asia?: Evidence using a multivariate VAR model," Journal of Asian Economics, Elsevier, Elsevier, vol. 14(1), pages 131-156, February.

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