International Credit Flows and Pecuniary Externalities

Markus K. Brunnermeier; Yuliy Sannikov

doi:10.3386/w20803

International Credit Flows and Pecuniary Externalities

Markus K. Brunnermeier & Yuliy Sannikov

Working Paper 20803

DOI 10.3386/w20803

Issue Date December 2014

This paper develops a dynamic two-country neoclassical stochastic growth model with incomplete markets. Short-term credit flows can be excessive and reverse suddenly. The equilibrium outcome is constrained inefficient due to pecuniary externalities. First, an undercapitalized country borrows too much since each firm does not internalize that an increase in production capacity undermines their output price, worsening their terms of trade. From an ex-ante perspective each firm undermines the natural “terms of trade hedge.” Second, sudden stops and fire sales lead to sharp price drops of illiquid capital. Capital controls or domestic macro-prudential measures that limit short-term borrowing can improve welfare.

We thank Mark Aguiar, Ozge Akinci, Gianluca Benigno, Zhiguo He, Sebastian Di Tella, Oleg Itskhoki, Anil Kashap, Guido Lorenzoni, Debbie Lucas, Ricardo Reis, Roberto Rigobon, Cedric Tille and participants at SED, NBER Summer Institute, IMF-Central Bank of Turkey conference, Barcelona Summer Forum, MFM conference, Yale University, World bank, Michigan State, UCL, Bank of England, London School of Economics, AEA Meetings in Philadelphia, Federal Reserve Board, NYU, the NBER conference on Lessons from the Financial Crisis in Boston, Boston College and at the Princeton Macro faculty lunch. We also thank Xiaoyang Sean Dong, Emil Verner, Christian Wolf, Yu Zhang and especially Zongbo Huang for excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

Markus K. Brunnermeier
Disclosures

2010-2013/01

As a guiding principle I follow the NBER Research Disclosure Policy: http://www.nber.org/researchdisclosurepolicy.html

To date, no single relationship (other than my salary form Princeton University) has accounted for more than 10 percent of my aggregate annual income in that year.

Significant Remunerated Activities:

Speaking engagements and lectures

Stifterverband der Deutschen Wirtschaft, 2012

Ambrosetti – The European House, 2011

Center for Investor Education, 2011

Wim Duisenberg School of Finance, 2010

Handelsbanken, 2010

Deutsche Bank, 2010

FEBRABAN, Brazil, 2009

Central banks

ECB, ESRB, Bank of England, National Bank of Austria, Swiss National Bank, Bank of Japan, Federal Reserve, New York Fed, Bank of Canada, Bank of Chile, Bank of Korea

International financial institution

IMF

Academic Organizations

Swiss Finance Institute, 2012-

No expert testimony for law suits or paid consulting work for private cooperation to date.

Research Grants:

Sloan Foundation 2011-12

Guggenheim Fellowship, 2010-11

University of Chicago, T.W. Schultz Prize and Lecture, 2010

INQUIRE Europe, Research Grant

Visiting Scholar and Other:

Milton Friedman Institute, visiting scholar 2011

American Economic Review, Journal of Finance, Associated Editorship

Significant Non-Compensated Activities:

American Finance Association: Director

Financial Advisory Roundtable and Monetary Policy Panel, Federal Reserve Bank of New York, 2006 – present

INET Advisory Board Member, 2009 – present

2010-2013/01
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Markus K. Brunnermeier and Yuliy Sannikov, "International Credit Flows and Pecuniary Externalities," NBER Working Paper 20803 (2014), https://doi.org/10.3386/w20803.

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International Credit Flows and Pecuniary Externalities

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