News-Driven International Credit Cycles

Galip Ozhan

Staff Working Papers from Bank of Canada

Abstract: How does news about future economic fundamentals affect within-country and cross-country credit allocation? How effective is unconventional policy when financial crises are driven by unfulfilled favorable news? I study these questions by employing a two-sector, two-country macroeconomic model with a financial sector in which financial crises are associated with occasionally binding leverage constraints. In response to positive news on the valuation of non-traded sector capital that turns out to be incorrect at a later date, the model captures the patterns of financial flows and current account dynamics in Spain between 2000-2010, including the changes in the sectoral allocation of bank credit and movements in cross-country borrowing during the boom and the bust. When there are unconventional policies by a common authority in response to unfulfilled favorable news, liquidity injections perform better in ameliorating the downturn than direct assets purchases from the non-traded sector.

Keywords: Central bank research; Digital currencies and fintech (search for similar items in EconPapers)
JEL-codes: E44 F32 F41 G15 G21 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2021-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cwa, nep-dge, nep-fdg, nep-ifn, nep-mac, nep-mon and nep-opm
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Journal Article: News-driven international credit cycles (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:21-66

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