Contagion and Volatility with Imperfect Credit Markets

Author/Editor:

Joshua Aizenman ; Pierre-Richard Agénor

Publication Date:

October 1, 1997

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper interprets contagion effects as an increase in the volatility of aggregate shocks impinging on the domestic economy. The implications of this approach are analyzed in a model with two types of credit market imperfections: domestic banks borrow at a premium on world capital markets, and domestic producers (whose demand for credit results from working capital needs) borrow at a premium from domestic banks. Higher volatility of producers’ productivity shocks increases both domestic and foreign financial spreads and the producers’ cost of capital, resulting in lower employment and higher incidence of default. Welfare effects are nonlinearly related to the degree of international financial integration.

Series:

Working Paper No. 97/127

Notes:

Also published in Staff Papers, Vol. 45, No. 2, June 1998.

English

Publication Date:

October 1, 1997

ISBN/ISSN:

9781451935967/1018-5941

Stock No:

WPIEA1271997

Format:

Paper

Pages:

33

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