Leverage Constraints and the International Transmission of Shocks

Michael Devereux and James Yetman

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: Recent macroeconomic experience has drawn attention to the importance of interdependence among countries through financial markets and institutions, independently of traditional trade linkages. This paper develops a model of the international transmission of shocks due to interdependent portfolio holdings among leverage-constrained financial institutions. In the absence of leverage constraints, international portfolio diversification has no implications for macroeconomic co-movements. When leverage constraints bind, however, the presence of diversified portfolios in combination with these constraints introduces a powerful financial transmission channel which results in a high correlation among macroeconomic aggregates during business cycle downturns, quite independent of the size of international trade linkages.

Keywords: leverage; international transmission; portfolios (search for similar items in EconPapers)
JEL-codes: F3 F32 F34 (search for similar items in EconPapers)
Date: 2009-12
New Economics Papers: this item is included in nep-bec, nep-ifn and nep-opm
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Citations: View citations in EconPapers (25)

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Related works:
Journal Article: Leverage Constraints and the International Transmission of Shocks (2010)
Journal Article: Leverage Constraints and the International Transmission of Shocks (2010)
Working Paper: Leverage constraints and the international transmission of shocks (2010)
Working Paper: Leverage Constraints and the International Transmission of Shocks (2010)
Working Paper: Leverage Constraints and the International Transmission of Shocks (2010)
Working Paper: leverage constraints and the international transmission of shocks (2010)
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