Contagion And Volatility With Imperfect Credit Markets
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Author | : Mr.Joshua Aizenman |
Publisher | : International Monetary Fund |
Total Pages | : 34 |
Release | : 1997-10-01 |
Genre | : Business & Economics |
ISBN | : 145193596X |
This paper interprets contagion effects as an increase in the volatility of aggregate shocks impinging on the domestic economy. The implications of this approach are analyzed in a model with two types of credit market imperfections: domestic banks borrow at a premium on world capital markets, and domestic producers (whose demand for credit results from working capital needs) borrow at a premium from domestic banks. Higher volatility of producers’ productivity shocks increases both domestic and foreign financial spreads and the producers’ cost of capital, resulting in lower employment and higher incidence of default. Welfare effects are nonlinearly related to the degree of international financial integration.
Author | : Pierre-Richard Agenor |
Publisher | : |
Total Pages | : 33 |
Release | : 2006 |
Genre | : |
ISBN | : |
This paper interprets contagion effects as an increase in the volatility of aggregate shocks impinging on the domestic economy. The implications of this approach are analyzed in a model with two types of credit market imperfections: domestic banks borrow at a premium on world capital markets, and domestic producers (whose demand for credit results from working capital needs) borrow at a premium from domestic banks. Higher volatility of producers` productivity shocks increases both domestic and foreign financial spreads and the producers` cost of capital, resulting in lower employment and higher incidence of default. Welfare effects are nonlinearly related to the degree of international financial integration.
Author | : Pierre-Richard Agénor |
Publisher | : |
Total Pages | : 33 |
Release | : 1997 |
Genre | : |
ISBN | : |
Author | : Pierre-Richard Agénor |
Publisher | : |
Total Pages | : 50 |
Release | : 1997 |
Genre | : Bank deposits |
ISBN | : |
This paper interprets contagion effects as a perceived increase (triggered by events occurring elsewhere) in the volatility of aggregate shocks impinging on the domestic economy. The implications of this approach are analyzed in a model with two types of credit market imperfections: domestic banks borrow at a premium on world capital markets, and domestic producers (whose demand for credit results from working capital needs) borrow at a premium from domestic banks which possess comparative advantage in monitoring the behavior of domestic agents. Financial intermediation spreads are shown to be determined by a markup that compensates for the expected cost of contract enforcement and state verification and for the expected revenue lost in adverse states of nature. Higher volatility of producers' productivity shocks increases both financial spreads and the producers' cost of capital, resulting in lower employment and higher incidence of default. The welfare effects of volatility are non-linear. Higher volatility does not impose any welfare cost for countries characterized by relatively low volatility and efficient financial intermediation. The adverse welfare effects are large (small) for countries that are at the threshold of full integration with international capital markets (close to financial autarky), that is, countries characterized by a relatively low (high) probability of default.
Author | : International Monetary Fund. Research Dept. |
Publisher | : International Monetary Fund |
Total Pages | : 203 |
Release | : 1998-01-01 |
Genre | : Business & Economics |
ISBN | : 1455277444 |
This paper analyzes contagion and volatility with imperfect credit markets. The paper interprets contagion effects as an increase in the volatility of shocks impinging on the economy. The implications of this approach are analyzed in a model in which domestic banks borrow at a premium on world capital markets, and domestic producers borrow at a premium from domestic banks. Financial spreads depend on a markup that compensates lenders, in particular, for the expected cost of contract enforcement. Higher volatility increases financial spreads and the producers’ cost of capital.
Author | : Mr.Garry J. Schinasi |
Publisher | : International Monetary Fund |
Total Pages | : 39 |
Release | : 1999-10-01 |
Genre | : Business & Economics |
ISBN | : 1451855796 |
Models of “contagion” rely on market imperfections to explain why adverse shocks in one asset market might be associated with asset sales in many unrelated markets. This paper demonstrates that contagion can be explained with basic portfolio theory without recourse to market imperfections. It also demonstrates that “Value-at-Risk” portfolio management rules do not have significantly different consequences for portfolio rebalancing and contagion than other rules. The paper’s main conclusion is that portfolio diversification and leverage may be sufficient to explain why investors would find it optimal to sell many higher-risk assets when a shock to one asset occurs.
Author | : Stijn Claessens |
Publisher | : Springer Science & Business Media |
Total Pages | : 461 |
Release | : 2013-04-17 |
Genre | : Business & Economics |
ISBN | : 1475733143 |
No sooner had the Asian crisis broken out in 1997 than the witch-hunt started. With great indignation every Asian economy pointed fingers. They were innocent bystanders. The fundamental reason for the crisis was this or that - most prominently contagion - but also the decline in exports of the new commodities (high-tech goods), the steep rise of the dollar, speculators, etc. The prominent question, of course, is whether contagion could really have been the key factor and, if so, what are the channels and mechanisms through which it operated in such a powerful manner. The question is obvious because until 1997, Asia's economies were generally believed to be immensely successful, stable and well managed. This question is of great importance not only in understanding just what happened, but also in shaping policies. In a world of pure contagion, i.e. when innocent bystanders are caught up and trampled by events not of their making and when consequences go far beyond ordinary international shocks, countries will need to look for better protective policies in the future. In such a world, the international financial system will need to change in order to offer better preventive and reactive policy measures to help avoid, or at least contain, financial crises.
Author | : Pierre-Richard Agénor |
Publisher | : World Bank Publications |
Total Pages | : 36 |
Release | : 1999 |
Genre | : Argentina |
ISBN | : |
A positive historical shock to external spreads can lead to an increase in domestic spreads and a reduction in the cyclical component of output. Shocks to external spreads immediately after the Mexican peso crisis had a sizable effect on movements in output and domestic interest rate spreads in Argentina.
Author | : Stijn Claessens |
Publisher | : |
Total Pages | : 28 |
Release | : 2003 |
Genre | : International finance |
ISBN | : |
Annotation This title can be previewed in Google Books - http://books.google.com/books?vid=ISBN9789056292669.
Author | : Mr.Paul R. Masson |
Publisher | : International Monetary Fund |
Total Pages | : 33 |
Release | : 1998-09-01 |
Genre | : Business & Economics |
ISBN | : 1451856229 |
Several concepts of contagion are distinguished. It is argued that only models that admit of multiple equilibria are capable of producing true contagion. A simple balance of payments model is presented to illustrate that phenomenon, and some back-of-the-envelope calculations assess its relevance to the coincidence of emerging market crises in 1994–95 and in 1997.