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Financial Globalization, Financial Crises and Contagion

  • Enrique G. Mendoza
  • Vincenzo Quadrini

Two observations suggest that financial globalization played an important role in the recent financial crisis. First, more than half of the rise in net borrowing of the U.S. nonfinancial sectors since the mid 1980s has been financed by foreign lending. Second, the collapse of the U.S. housing and mortgage-backed-securities markets had worldwide effects on financial institutions and asset markets. Using an open-economy model where financial intermediaries play a central role, we show that financial integration leads to a sharp rise in net credit in the most financially developed country and leads to large asset price spillovers of country-specific shocks to bank capital. The impact of these shocks on asset prices are amplified by bank capital requirements based on mark-to-market.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15432.

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Date of creation: Oct 2009
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Publication status: published as Mendoza, Enrique G. & Quadrini, Vincenzo, 2010. "Financial globalization, financial crises and contagion," Journal of Monetary Economics, Elsevier, vol. 57(1), pages 24-39, January.
Handle: RePEc:nbr:nberwo:15432
Note: EFG IFM
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  1. Kosuke Aoki & Gianluca Benigno & Nobuhiro Kiyotak, 2007. "Capital flows and asset prices," LSE Research Online Documents on Economics 3168, London School of Economics and Political Science, LSE Library.
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  21. Césaire Meh & Kevin Moran, 2008. "The Role of Bank Capital in the Propagation of Shocks," Working Papers 08-36, Bank of Canada.
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