Risky Banks and Macro-Prudential Policy for Emerging Economies

Gabriel Cuadra and Victoria Nuguer

Review of Economic Dynamics, 2018, vol. 30, 125-144

Abstract: We develop a two-country DSGE model with financial intermediaries to analyze the role of cross-border bank flows in the transmission of a U.S. bank's balance sheet shock to emerging market economies (EMEs). In the model, banks in both countries face an agency problem when borrowing from domestic households. EME banks might also be constrained in borrowing from U.S. banks, what we call risky EME banks. A negative quality of capital shock in the United States generates a global financial crisis. EME's macro-prudential policy that targets non-core liabilities (cross-border bank flows) makes the domestic economy resilient to the volatility of cross-border bank flows and makes EME's households better off. (Copyright: Elsevier)

Keywords: Cross-border bank flows; Emerging market economies; Financial frictions; Macro-prudential policy; DSGE models (search for similar items in EconPapers)
JEL-codes: E44 F42 G21 G28 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (15)

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Working Paper: Risky Banks and Macroprudential Policy for Emerging Economies (2016)
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DOI: 10.1016/j.red.2018.05.001

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