Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/261252 
Authors: 
Year of Publication: 
2021
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2021-66
Publisher: 
Bank of Canada, Ottawa
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 nontraded 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.
Subjects: 
Credit and credit aggregates
Economic models
Financial stability
Sectoral balance sheet
Recent economic and financial developments
JEL: 
E44
F32
F41
G15
G21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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