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Capital Flows and Moral Hazard

  • Viktor Tsyrennikov


I solve for the optimal (state-contingent) contract and find that moral hazard friction is sufficient to explain capital outflows in low output states –- a defining feature of the emerging markets business cycles. On the other hand, the model that also includes limited enforcement is inconsistent with this fact. The model with moral hazard also performs well in explaining quantitative properties of Argentina's business cycle.

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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 455.

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Date of creation: 2007
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Handle: RePEc:red:sed007:455
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  1. Kocherlakota, Narayana & Pistaferri, Luigi, 2007. "Household Heterogeneity and Real Exchange Rates," CEPR Discussion Papers 6192, C.E.P.R. Discussion Papers.
  2. Mark Aguiar & Gita Gopinath, 2004. "Defaultable debt, interest rates, and the current account," Working Papers 04-5, Federal Reserve Bank of Boston.
  3. Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2003. "External constraints on monetary policy and the financial accelerator," BIS Working Papers 139, Bank for International Settlements.
  4. Cristina Arellano, 2005. "Default Risk, the Real Exchange Rate and Income Fluctuations in Emerging Economies," 2005 Meeting Papers 516, Society for Economic Dynamics.
  5. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
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