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The effects of asymmetric information between borrowers and lenders in an open economy

  • Claus, Iris

This paper assesses the effects of asymmetric information between borrowers and lenders in an open economy with access to international capital markets. Information asymmetry and agency costs arise because only borrowers can costlessly observe actual returns from production. Agency costs increase the cost of external finance and lower steady state investment, capital and output. They also affect the business cycle and the central bank's response to shocks. The long-run effects of agency costs are exacerbated in an open economy and their impact is influenced by the degree of access to international capital markets. The results thus highlight the importance of incorporating credit market interactions into open economy macroeconomic models.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 30 (2011)
Issue (Month): 5 (September)
Pages: 796-816

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Handle: RePEc:eee:jimfin:v:30:y:2011:i:5:p:796-816
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  8. McCallum, Bennett T & Nelson, Edward, 2001. "Monetary Policy for an Open Economy: An Alternative Framework with Optimizing Agents and Sticky Prices," CEPR Discussion Papers 2756, C.E.P.R. Discussion Papers.
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