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Financial Globalization, Financial Crises and Contagion

  • Vincenzo Quadrini

    (USC)

  • Enrique G. Mendoza

    (University of Maryland)

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 Society for Economic Dynamics in its series 2010 Meeting Papers with number 841.

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Date of creation: 2010
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Handle: RePEc:red:sed010:841
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