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Global implications of national unconventional policies

Luca Dedola (), Peter Karadi () and Giovanni Lombardo ()

Journal of Monetary Economics, 2013, vol. 60, issue 1, 66-85

Abstract: Financial integration in the markets for banks' assets and liabilities makes balance sheet constraints highly correlated across countries, resulting in a high degree of financial and macroeconomic interdependence. Likewise, under financial integration unconventional policies aimed at stabilizing domestic financial and credit conditions could entail large international spillovers. Therefore, stabilization by one country will also benefit other countries, reducing incentives to implement credit policies in a classic free-riding problem, especially when these policies entail domestic costs. We show that this outcome can emerge in an open economy model featuring financial intermediaries that face endogenously determined balance sheet constraints.

Date: 2013
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