International Contagion Through Leveraged Financial Institutions
The 2008-2009 financial crises, while originating in the United States, witnessed a drop in asset prices and output that was at least as large in the rest of the world as in the United States. A widely held view is that this was the result of global transmission through leveraged financial institutions. We investigate this in the context of a simple two-country model. The paper highlights what the various transmission mechanisms associated with balance sheet losses are, how they operate, what their magnitudes are and what the role is of different types of borrowing constraints faced by leveraged institutions. For realistic parameters we find that the model cannot account for the global nature of the crisis, both in terms of the size of the impact and the extent of transmission.
The paper has benefitted from comments by Nicolas Coeurdacier, Ricardo Correa, Matteo Iacoviello and participants of workshops at the Board of Governors, ECB and the conference "The Financial Crisis: Lessons for International Macroeconomics'' at the Paris School of Economics. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Eric van Wincoop, 2013. "International Contagion through Leveraged Financial Institutions," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 152-89, July. citation courtesy of