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Contagion and Volatility with Imperfect Credit Markets

Author

Listed:
  • Pierre-Richard Agénor

    (International Monetary Fund)

  • Joshua Aizenman

    (International Monetary Fund)

Abstract

This paper interprets contagion effects as an increase in the volatility of shocks impinging on the economy. The implications of this approach are analyzed in a model in which domestic banks borrow at a premium on world capital markets, and domestic producers borrow at a premium from domestic banks. Financial spreads depend on a markup that compensates lenders, in particular, for the expected cost of contract enforcement. Higher volatility increases financial spreads and the producers' cost of capital, resulting in lower employment and higher incidence of default. Welfare effects are nonlinearly related to the degree of international financial integration.

Suggested Citation

  • Pierre-Richard Agénor & Joshua Aizenman, 1998. "Contagion and Volatility with Imperfect Credit Markets," IMF Staff Papers, Palgrave Macmillan, vol. 45(2), pages 207-235, June.
  • Handle: RePEc:pal:imfstp:v:45:y:1998:i:2:p:207-235
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    References listed on IDEAS

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    1. Joshua Aizenman & Michael Gavin & Ricardo Hausmann, 2001. "Optimal tax and debt policy with endogenously imperfect creditworthiness," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 9(4), pages 367-395.
    2. Calvo, Guillermo A. & Kaminsky, Graciela L., 1991. "Debt relief and debt rescheduling : The optimal-contract approach," Journal of Development Economics, Elsevier, vol. 36(1), pages 5-36, July.
    3. Martin Uribe, 1996. "The Tequila effect: theory and evidence from Argentina," International Finance Discussion Papers 552, Board of Governors of the Federal Reserve System (U.S.).
    4. Ilan Goldfajn & Rodrigo Valdés, 1997. "Balance of Payments Crises and Capital Flows: The Role of Liquidity," Working Papers Central Bank of Chile 11, Central Bank of Chile.
    5. Luis Catão, 1997. "Bank Credit in Argentina in the Aftermath of the Mexican Crisis; Supply or Demand Constrained?," IMF Working Papers 97/32, International Monetary Fund.
    6. Jaffee, Dwight & Stiglitz, Joseph, 1990. "Credit rationing," Handbook of Monetary Economics,in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 16, pages 837-888 Elsevier.
    7. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being

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