International Credit Flows and Pecuniary Externalities

Markus Brunnermeier and Yuliy Sannikov

No 20803, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops a dynamic two-country neoclassical stochastic growth model with incomplete markets. Short-term credit flows can be excessive and reverse suddenly. The equilibrium outcome is constrained inefficient due to pecuniary externalities. First, an undercapitalized country borrows too much since each firm does not internalize that an increase in production capacity undermines their output price, worsening their terms of trade. From an ex-ante perspective each firm undermines the natural “terms of trade hedge.” Second, sudden stops and fire sales lead to sharp price drops of illiquid capital. Capital controls or domestic macro-prudential measures that limit short-term borrowing can improve welfare.

JEL-codes: F32 F43 G15 O41 (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-cta, nep-dge, nep-ifn and nep-opm
Note: AP EFG IFM ITI
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Citations: View citations in EconPapers (15)

Published as Markus K. Brunnermeier & Yuliy Sannikov, 2015. "International Credit Flows and Pecuniary Externalities," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 297-338, January.
Published as International Credit Flows and Pecuniary Externalities , Markus K. Brunnermeier, Yuliy Sannikov. in Lessons from the Financial Crisis for Monetary Policy , Gertler. 2015

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Journal Article: International Credit Flows and Pecuniary Externalities (2015)
Working Paper: International Credit Flows and Pecuniary Externalities (2015)
Working Paper: International Credit Flows and Pecuniary Externalities (2015)
Chapter: International Credit Flows and Pecuniary Externalities (2013)
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