International Credit Flows and Pecuniary Externalities
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
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Stifterverband der Deutschen Wirtschaft, 2012
Ambrosetti – The European House, 2011
Center for Investor Education, 2011
Wim Duisenberg School of Finance, 2010
Deutsche Bank, 2010
FEBRABAN, Brazil, 2009
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
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Swiss Finance Institute, 2012-
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Sloan Foundation 2011-12
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University of Chicago, T.W. Schultz Prize and Lecture, 2010
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American Economic Review, Journal of Finance, Associated Editorship
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American Finance Association: Director
Financial Advisory Roundtable and Monetary Policy Panel, Federal Reserve Bank of New York, 2006 – present
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Markus K. Brunnermeier & Yuliy Sannikov, 2015. "International Credit Flows and Pecuniary Externalities," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 297-338, January. citation courtesy of
International Credit Flows and Pecuniary Externalities, Markus K. Brunnermeier, Yuliy Sannikov. in Lessons from the Financial Crisis for Monetary Policy, Gertler. 2015