Working Paper: NBER ID: w28892
Authors: Juan M. Morelli; Pablo Ottonello; Diego J. Perez
Abstract: We study the role of global financial intermediaries in international lending. We construct a model of the world economy, in which heterogeneous borrowers issue risky securities purchased by financial intermediaries. Aggregate shocks transmit internationally through financial intermediaries' net worth. The strength of this transmission is governed by the degree of frictions intermediaries face in financing their risky investments. We provide direct empirical evidence on this mechanism showing that around Lehman Brothers' collapse, emerging-market bonds held by more distressed global banks experienced larger price contractions. A quantitative analysis of the model shows that global financial intermediaries play a relevant role in driving borrowing-cost and consumption fluctuations in emerging-market economies, during both debt crises and regular business cycles. The portfolio of financial intermediaries and the distribution of bond holdings in the world economy are key to determine aggregate dynamics.
Keywords: global financial intermediaries; international lending; emerging market economies; debt crises; bond prices
JEL Codes: E3; F3; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| global financial intermediaries' net worth (F65) | bond prices of emerging market economies (G15) |
| contraction in net worth of global financial intermediaries (F65) | borrowing costs in emerging market economies (F34) |
| financial intermediaries' net worth (G23) | ability to finance risky investments (G32) |
| ability to finance risky investments (G32) | bond prices of emerging market economies (G15) |