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International Credit Flows and Pecuniary Externalities

Author

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  • Markus K. Brunnermeier
  • Yuliy Sannikov

Abstract

This paper develops a dynamic two-country neoclassical stochastic growth model with incomplete markets. Short-term credit flows can be excessive and reverse suddenly. The equilibrium outcome is constrained inefficient due to pecuniary externalities. First, an undercapitalized country borrows too much since each firm does not internalize that an increase in production capacity undermines their output price, worsening their terms of trade. From an ex ante perspective each firm undermines the natural "terms of trade hedge". Second, sudden stops and fire sales lead to sharp price drops of illiquid capital. Capital controls or domestic macro-prudential measures that limit short-term borrowing can improve welfare. (JEL F32, F43, G15, O41)

Suggested Citation

  • Markus K. Brunnermeier & Yuliy Sannikov, 2015. "International Credit Flows and Pecuniary Externalities," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 297-338, January.
  • Handle: RePEc:aea:aejmac:v:7:y:2015:i:1:p:297-338
    Note: DOI: 10.1257/mac.20140054
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. ACHARYA, Suchant & BENGUI, Julien, 2015. "Liquidity traps, capital flows," Cahiers de recherche 2015-09, Universite de Montreal, Departement de sciences economiques.
    2. Benigno, Gianluca & Chen, Huigang & Otrok, Christopher & Rebucci, Alessandro & Young, Eric R., 2016. "Optimal capital controls and real exchange rate policies: A pecuniary externality perspective," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 147-165.
    3. Nadav Ben Zeev, 2017. "Exchange Rate Regimes And Sudden Stops," Working Papers 1712, Ben-Gurion University of the Negev, Department of Economics.
    4. David Perez-Reyna, 2016. "El rol del Banco de la República en la crisis de 1999," DOCUMENTOS CEDE 014574, UNIVERSIDAD DE LOS ANDES-CEDE.
    5. repec:eee:macchp:v2-1497 is not listed on IDEAS
    6. Chris Garbers & Guangling Liu, 2017. "Flow specific capital controls for emerging markets," Working Papers 12/2017, Stellenbosch University, Department of Economics.
    7. repec:bis:bisbps:95 is not listed on IDEAS
    8. Davis, J. Scott & Presno, Ignacio, 2017. "Capital controls and monetary policy autonomy in a small open economy," Journal of Monetary Economics, Elsevier, vol. 85(C), pages 114-130.
    9. repec:kap:openec:v:28:y:2017:i:4:d:10.1007_s11079-017-9441-4 is not listed on IDEAS
    10. Guangling Liu & Fernando Garcia-Barragan, 2017. "Capital Controls and Foreign Currency Denomination," 2017 Meeting Papers 415, Society for Economic Dynamics.
    11. Bodenstein, Martin & Guerrieri, Luca & LaBriola, Joe, 2014. "Macroeconomic Policy Games," Finance and Economics Discussion Series 2014-87, Board of Governors of the Federal Reserve System (U.S.).
    12. repec:eee:inecon:v:109:y:2017:i:c:p:43-67 is not listed on IDEAS
    13. Shigeto Kitano & Kenya Takaku, 2017. "Capital Controls and Financial Frictions in a Small Open Economy," Open Economies Review, Springer, vol. 28(4), pages 761-793, September.
    14. McNelis, Paul D., 2016. "Optimal policy rules at home, crisis and quantitative easing abroad," BOFIT Discussion Papers 15/2016, Bank of Finland, Institute for Economies in Transition.

    More about this item

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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