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Contagion and Volatility with Imperfect Credit Markets

  • Joshua Aizenman
  • Pierre-Richard Agénor

This paper interprets contagion effects as an increase in the volatility of aggregate shocks impinging on the domestic economy. The implications of this approach are analyzed in a model with two types of credit market imperfections: domestic banks borrow at a premium on world capital markets, and domestic producers (whose demand for credit results from working capital needs) borrow at a premium from domestic banks. Higher volatility of producers’ productivity shocks increases both domestic and foreign 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.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 97/127.

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Length: 33
Date of creation: 01 Oct 1997
Date of revision:
Handle: RePEc:imf:imfwpa:97/127
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  1. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  2. Joshua Aizenman & Michael Gavin & Ricardo Hausmann, 1996. "Optimal Tax and Debt Policy with Endogenously Imperfect Creditworthiness," NBER Working Papers 5558, National Bureau of Economic Research, Inc.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.).
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