Credit Constraints and the North-South Transmission of Crises

Nguyen, Ha

Credit Constraints and the North-South Transmission of Crises

Adverse shocks to rich countries often have a large and persistent negative impact on investment and output in developing countries. This paper examines a transmission mechanism that can account for this stylized fact. The mechanism is based on the existence of international financial frictions. Specifically, if a small, developing country has to collateralize its assets to borrow funds to invest, falling asset prices caused by a negative shock in an advanced economy worsen the developing country's collateral value and reduce its ability to borrow and reinvest. Hence, investment in the developing country declines, and international investors repatriate capital to the advanced country. As less capital now can be pledged as collateral, the developing country's credit constraint is further tightened, which leads to another round of decline in investment. This generates a downward spiral that may cause large output losses to the developing country. The mechanism finds empirical support in the 2008-2009 crisis data.

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Bibliographic Details
Main Author:	Nguyen, Ha
Format:	Policy Research Working Paper biblioteca
Language:	English
Published:	2010-08-01
Subjects:	ACCELERATOR, ACCOUNTING, ADVANCED COUNTRIES, ADVANCED COUNTRY, ADVANCED ECONOMIES, ADVANCED ECONOMY, ADVERSE IMPACT, ADVERSE IMPACTS, AFFILIATED ORGANIZATIONS, ASSET PRICE, ASSET PRICES, ASSET VALUE, BAILOUT, BENCHMARK, BORROWING CAPACITY, BUDGET CONSTRAINT, BUSINESS CYCLE, BUSINESS CYCLES, CAPITAL FLOWS, CAPITAL MARKET, CAPITAL MOVEMENTS, CAPITAL OUTFLOWS, CAPITAL REPATRIATION, CAPITAL STOCK, COLLATERAL, CONSUMPTION INCREASES, COST OF CAPITAL, COUNTRY CREDITS, CREDIT CONSTRAINT, CREDIT CONSTRAINTS, DEBT DATA, DEBT LEVEL, DEBT MARKET, DEBT OUTSTANDING, DEBT REPAYMENTS, DECLINE IN INVESTMENT, DEVELOPING COUNTRIES, DEVELOPING COUNTRY, DEVELOPING ECONOMY, DURABLE, DURABLE ASSET, DURABLE GOOD, ECONOMIC RESEARCH, ECONOMIC THEORY, EMERGING MARKET, EMERGING MARKET COUNTRIES, EMERGING MARKETS, ENFORCEMENT MECHANISM, EXTERNAL DEBT, EXTERNALITY, FINANCIAL CONTAGION, FINANCIAL CRISES, FINANCIAL CRISIS, FINANCIAL INTEGRATION, FINANCIAL MARKETS, FINANCIAL SYSTEM, FOREIGN BANKS, FOREIGN CAPITAL, FOREIGN INVESTORS, GDP, GLOBALIZATION, GLOBALIZATION OF SECURITIES, GROWTH RATES, HOLDINGS, HOME COUNTRIES, INTEREST RATE, INTERNATIONAL BANK, INTERNATIONAL ECONOMICS, INTERNATIONAL FINANCIAL CRISES, INTERNATIONAL FINANCIAL INSTITUTIONS, INTERNATIONAL FINANCIAL STATISTICS, INTERNATIONAL INVESTORS, INVESTING, LENDERS, LOAN, LONG TERM DEBT, MACROECONOMICS, MARGINAL PRODUCT, MARGINAL PRODUCTIVITY, MARGINAL UTILITY, MARKET INTEREST, MARKET INTEREST RATE, MARKET PRICE, MONETARY POLICY, NEGATIVE SHOCK, NEGATIVE SHOCKS, OPEN ECONOMIES, OUTPUT, OUTPUT LOSSES, POLITICAL ECONOMY, PORTFOLIO, PORTFOLIO CONSTRAINTS, PORTFOLIOS, PRICE DECLINES, PRODUCTION FUNCTION, PRODUCTIVITY, REAL EXCHANGE RATE, REPAYMENT, RETURN, RETURN ON INVESTMENT, RETURNS TO SCALE, RISK AVERSE, RISK AVERSION, RISK NEUTRAL, SECURITIES MARKETS, SHARE OF CAPITAL, SPOT MARKET, STOCK INDICES, STOCK MARKET, STOCK MARKETS, STOCK PRICES, STOCK RETURNS, TAXATION, TECHNOLOGY TRANSFER, TERMS OF CAPITAL, VOLATILITY, WORLD ECONOMY,
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100830130101 http://hdl.handle.net/10986/3893
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