International Credit Flows and Pecuniary Externalities

53 Pages Posted: 23 Jan 2015

See all articles by Markus K. Brunnermeier

Markus K. Brunnermeier

Princeton University - Department of Economics

Yuliy Sannikov

Princeton University

Multiple version iconThere are 3 versions of this paper

Date Written: January 2015


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.

Keywords: hot money, international capital flows, international credit flows, pecuniary externalities, sudden stops, terms of trade hedge

JEL Classification: F33, F34, F36, F38, F41, G15

Suggested Citation

Brunnermeier, Markus Konrad and Sannikov, Yuliy, International Credit Flows and Pecuniary Externalities (January 2015). Available at SSRN:

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:¡­markus

Yuliy Sannikov

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

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

Paper statistics

Abstract Views
PlumX Metrics