International Credit Flows and Pecuniary Externalities

52 Pages Posted: 5 Jan 2015 Last revised: 5 Nov 2021

See all articles by Markus K. Brunnermeier

Markus K. Brunnermeier

Princeton University - Department of Economics

Yuliy Sannikov

Stanford GSB

Multiple version iconThere are 3 versions of this paper

Date Written: December 2014

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.

Suggested Citation

Brunnermeier, Markus Konrad and Sannikov, Yuliy, International Credit Flows and Pecuniary Externalities (December 2014). Available at SSRN: https://ssrn.com/abstract=2545181

Markus Konrad Brunnermeier (Contact Author)

Princeton University - Department of Economics ( email )

Bendheim Center for Finance
Princeton, NJ
United States
609-258-4050 (Phone)
609-258-0771 (Fax)

HOME PAGE: http://www.princeton.edu/¡­markus

Yuliy Sannikov

Stanford GSB ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
19
Abstract Views
393
PlumX Metrics