Working Paper: NBER ID: w8758
Authors: Ricardo J. Caballero; Arvind Krishnamurthy
Abstract: The last few years have seen a significant re-evaluation of the models used to analyze crises in emerging markets. Recent models typically stress financial constraints or distorted financial incentives. While this certainly represents progress, these models share a weakness with the earlier work: neither is uniquely about emerging markets. Adaptations of the Mundell-Fleming model represent Argentina as a Belgium with larger external shocks. Likewise, emerging market models of financial constraints are adaptations of developed economy ones with tighter financial constraints. In our work, we have advocated a model which distinguishes between the financial constraints affecting borrowing and lending among agents within an emerging economy, and those affecting borrowing from foreign lenders. This 'dual liquidity' model offers a parsimonious description of the behavior of firms, governments, and asset prices during financial crises. It also provides prescriptions for optimal policy responses to these crises.
Keywords: No keywords provided
JEL Codes: E0; E4; E5; F0; F3; F4; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic financial constraints (G59) | Lending behavior of firms (G21) |
| Lending behavior of firms (G21) | Asset prices (G19) |
| Domestic financial constraints (G59) | Asset prices (G19) |
| Foreign borrowing constraints (F34) | Government policy responses (E65) |