Contagion and Volatility with Imperfect Credit Markets

Pierre-Richard Agénor and Joshua Aizenman
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Pierre-Richard Agénor: International Monetary Fund
Authors registered in the RePEc Author Service: Pierre-Richard Agénor

IMF Staff Papers, 1998, vol. 45, issue 2, 207-235

Abstract: This paper interprets contagion effects as an increase in the volatility of shocks impinging on the economy. The implications of this approach are analyzed in a model in which domestic banks borrow at a premium on world capital markets, and domestic producers borrow at a premium from domestic banks. Financial spreads depend on a markup that compensates lenders, in particular, for the expected cost of contract enforcement. Higher volatility increases financial spreads and the producers' cost of capital, resulting in lower employment and higher incidence of default. Welfare effects are nonlinearly related to the degree of international financial integration.

JEL-codes: E44 F36 I31 (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (60)

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Related works:
Working Paper: Contagion and Volatility with Imperfect Credit Markets (1997)
Working Paper: Contagion and Volatility with Imperfect Credit Markets (1997)
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