Bond Finance, Bank Credit, and Aggregate Fluctuations in an Open Economy
Corporate sectors in emerging markets have noticeably increased their reliance on foreign financing, presumably reflecting low global interest rates. The evidence also shows a rebalancing from bank loans towards bonds. To study these developments, this paper develops a dynamic open economy model where these modes of finance are determined endogenously. The model replicates the stylized facts following a drop in world interest rates; in particular, rebalancing towards bonds occurs because bank credit becomes relatively more expensive, reflecting the scarcity of bank equity. More generally, the model is suitable for studying interactions between modes of finance and the macroeconomy.
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| Format: | Working Papers biblioteca |
| Language: | English |
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Inter-American Development Bank
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| Subjects: | Financial Bond, Credit, Corporate Debt, Interest Rate, Capital Goods, Financial Friction, E32 - Business Fluctuations • Cycles, E44 - Financial Markets and the Macroeconomy, F41 - Open Economy Macroeconomics, G31 - Capital Budgeting • Fixed Investment and Inventory Studies • Capacity, capital goods;interest rates;bond finance, |
| Online Access: | http://dx.doi.org/10.18235/0011758 https://publications.iadb.org/en/bond-finance-bank-credit-and-aggregate-fluctuations-open-economy-0 |
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| Summary: | Corporate sectors in emerging markets have noticeably increased their reliance on foreign financing, presumably reflecting low global interest rates. The evidence also shows a rebalancing from bank loans towards bonds. To study these developments, this paper develops a dynamic open economy model where these modes of finance are determined endogenously. The model replicates the stylized facts following a drop in world interest rates; in particular, rebalancing towards bonds occurs because bank credit becomes relatively more expensive, reflecting the scarcity of bank equity. More generally, the model is suitable for studying interactions between modes of finance and the macroeconomy. |
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