Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/107360
Authors: 
Brunnermeier, Markus
Sannikov, Yuliy
Year of Publication: 
2015
Series/Report no.: 
CESifo Working Paper 5170
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.
Subjects: 
credit flows
capital flows
sudden stops
pecuniary externalities
hot money
Phoenix Miracle
terms of trade hedge
JEL: 
F33
F34
F36
F38
F41
G15
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.