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Contagion, bank lending spreads, and output fluctuations

  • Agenor, Pierre-Richard
  • Aizenman, Joshua
  • Hoffmaister, Alexander

The authors study how contagion affects bank lending spreads and fluctuations in output in Argentina. They analyze what determines bank lending spreads when verification and enforcement costs for loan contracts are high. They present estimates of a vector auto-regression model that relates bank lending spreads, the cyclical component of output, the real bank lending rate, and the spread in external interest rates. Using generalized impulse response functions, they show that a positive historical shock to external spreads leads to an increase in domestic spreads and a reduction in the cyclical component of output. Historical decompositions indicate that shocks to external spreads immediately after the Mexican peso crisis had a sizable effect on movements in output and domestic interest rate spreads in Argentina.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2186.

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Date of creation: 30 Sep 1999
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Handle: RePEc:wbk:wbrwps:2186
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  1. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Technical Working Papers 0100, National Bureau of Economic Research, Inc.
  2. Peter Isard & Liliana Rojas-Suárez & Donald J. Mathieson, 1992. "A Framework for the Analysis of Financial Reforms and the Cost of official Safety Nets," IMF Working Papers 92/31, International Monetary Fund.
  3. Edwards, Sebastian & Vegh, Carlos A., 1997. "Banks and macroeconomic disturbances under predetermined exchange rates," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 239-278, October.
  4. Pierre-Richard Agénor, 1997. "Borrowing Risk and the Tequila Effect," IMF Working Papers 97/86, International Monetary Fund.
  5. Ho, Thomas S. Y. & Saunders, Anthony, 1981. "The Determinants of Bank Interest Margins: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(04), pages 581-600, November.
  6. Greenwald, Bruce C & Stiglitz, Joseph E, 1993. "Financial Market Imperfections and Business Cycles," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 77-114, February.
  7. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  8. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
  9. Pierre-Richard Agénor & Joshua Aizenman, 1998. "Contagion and Volatility with Imperfect Credit Markets," IMF Staff Papers, Palgrave Macmillan, vol. 45(2), pages 207-235, June.
  10. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  11. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
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