Working Paper: NBER ID: w28834
Authors: Maryam Farboodi; Peter Kondor
Abstract: We investigate the heterogeneous boom and bust patterns across countries that emerge as a result of global shocks. Our analysis sheds light on the emergence of core and periphery countries, and the joint determination of the depth of recessions and tightness of credit markets across countries. The model implies that interest rates are similar across core and periphery countries in booms, with larger credit and output growth in periphery countries. However, a common global shock that leads to a credit crunch across the globe gives rise to a sharper spike in interest rates and a deeper recession in periphery countries, while a credit flight to the core alleviates the adverse consequences in these countries. We explore the implication of the model about credit spreads, portfolio rebalancing, investment, non-performing debt and concentration of debt ownership during booms and busts, both in the time series and in the cross-section, and connect them to existing stylized facts. We further demonstrate how the anatomy of the global economy evolves as a result of aggregate demand and supply shocks to financing, such as a global saving glut.
Keywords: No keywords provided
JEL Codes: F4; F44; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| global shocks (F69) | heterogeneous boom and bust patterns (E32) |
| credit crunch (E51) | higher interest rates in peripheral countries (E49) |
| credit crunch (E51) | deeper recessions in peripheral countries (F44) |
| investor behavior (G41) | investment decisions (G11) |
| creditworthiness (F34) | investment decisions (G11) |
| investor behavior (G41) | market conditions (P42) |
| boom periods (E32) | greater credit inflows in periphery countries (F65) |
| bust periods (E32) | challenges in obtaining credit in periphery countries (F34) |
| misallocation of capital (E22) | exacerbation of economic cycles (E32) |