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Foreign Lenders in Emerging Economies

  • Raoul Minetti

    (Michigan State University)

  • Matteo Iacoviello

    (Boston College)

In recent decades, after liberalizing their credit markets emerging economies have frequently experienced sustained output growth but also large volatility of output and asset (e.g., real estate) prices. This paper studies an economy where firms face credit constraints tied to the pledgeable returns - output and collateralizable assets - of their investments and domestic and foreign lenders have different comparative advantages in obtaining investment returns. Building on evidence from emerging economies, we postulate that foreign lenders are more efficient than domestic ones in monitoring the output of specialized assets but have less information in the local market where assets are traded. The analysis reveals that opening the economy to foreign lenders can raise average productivity and output but also the volatility of output and of the price of collateral assets over the business cycle. These effects appear more pronounced the lower is the degree of contract enforceability in the economy.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1050.

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Date of creation: 2010
Date of revision:
Handle: RePEc:red:sed010:1050
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. Giovanni Dell'Ariccia & Ezra Friedman & Robert Marquez, 1999. "Adverse Selection as a Barrier to Entry in the Banking Industry," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 515-534, Autumn.
  2. Aaron Tornell & Frank Westermann & Lorenza Martinez, 2003. "Liberalization, Growth, and Financial Crises: Lessons from Mexico and the Developing World," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 1-112.
  3. Giannetti, Mariassunta & Ongena, Steven, 2005. "Financial Integration and Entrepreneurial Activity: Evidence from Foreign Bank Entry in Emerging Markets," CEPR Discussion Papers 5151, C.E.P.R. Discussion Papers.
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