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Financial intermediation, resource allocation, and macroeconomic interdependence

Galip Ozhan

Journal of Monetary Economics, 2020, vol. 115, issue C, 265-278

Abstract: During the first decade of the euro, southern countries experienced a boom-bust cycle in bank lending, non-tradable sector growth, and capital inflows. I develop a quantitative, open economy model of banking that is consistent with the banks’ behavior in credit allocation and foreign borrowing observed in Spanish data. I illustrate how movements in the frictions of cross-border deposits generate an endogenous asymmetric allocation of bank credit toward non-traded sectors, while producing a persistent and climbing current account deficit. A common central bank’s unconventional policies in response to sudden stops are successful at ameliorating the downturn.

Keywords: Bank credit; Sectoral allocation; Deposits; Capital flows; Europe (search for similar items in EconPapers)
JEL-codes: E44 F32 F41 G15 G21 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Financial intermediation, resource allocation, and macroeconomic interdependence (2016) Downloads
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DOI: 10.1016/j.jmoneco.2019.07.001

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